Homework Problems (40 points)

Miguel pays monthly banking fees of $16 for his checking account. If he continues with this account for 6 years, calculate the total cost of these banking fees over this period.
A payday loan company charges a $60 fee for a $1,000 two-week loan. Calculate the annual interest rate this represents.
Calculate the following for these savings scenarios: a) The value of a savings account started with $700, earning 4 percent interest compounded annually after 10 years. b) If Brenda Young wants to have $15,000 in 5 years and can earn 8 percent on her investments, how much should she deposit now as a single payment? c) If someone deposits $1,800 annually into an account earning 8 percent, how much would they have after 30 years?
Complete the bank reconciliation with the following information:
- Bank statement balance: $680
- Outstanding checks: $112
- Deposit in transit: $60
- Checkbook balance: $642
- Bank fees: $12
- ATM withdrawals not recorded in checkbook: $80
- Interest earned: $8
- Direct deposits not recorded in checkbook: $70
- Calculate both the adjusted bank balance and the adjusted checkbook balance to verify they match.

Case Analysis: Financial Services Options (30 points)

Read the following case study and answer the questions below:

Case Study:

The Johnson family is evaluating different financial services options. They are considering mobile banking, prepaid debit cards, and check-cashing outlets as alternatives to traditional banking services. The family consists of two working parents with moderate income and two teenage children. They live in a suburban area with access to various financial institutions, but they frequently travel for their children’s sporting events and have busy schedules.

They are concerned about convenience, costs, security, and having appropriate financial services that meet their specific needs. The family currently maintains a checking account but finds the minimum balance requirements and monthly fees challenging. One family member previously experienced identity theft, making them particularly concerned about privacy and security issues.

Questions:

R1. Analyze the benefits and drawbacks of each financial service option (mobile banking, prepaid debit cards, and check-cashing outlets) for the Johnson family.

R2. What factors should the Johnson family consider when selecting a financial institution or service? Include both general considerations and factors specific to their situation.

R3. What research actions would you recommend the Johnson family take before making their decision? Include how they should address security concerns.

SOLUTION

1. Banking Fees Over 6 Years

Monthly fee = $16
Time = 6 years
Months in a year = 12

Total cost = $16 × 12 × 6 = $1,152

2. Payday Loan Interest Rate

Loan amount = $1,000
Fee = $60
Loan term = 2 weeks
There are 52 weeks in a year, so 26 two-week periods.

Interest rate per period = $60 / $1,000 = 0.06 or 6%
Annual interest rate = 0.06 × 26 = 156%

3. Savings Scenarios

a) Future Value (FV) with Compounded Interest

Principal (P) = $700
Rate (r) = 4% or 0.04
Time (t) = 10 years
Formula: FV = P(1 + r)^t

FV = 700 × (1 + 0.04)^10 = 700 × 1.48024 = $1,036.17

b) Present Value Needed to Reach Future Goal

Future Value (FV) = $15,000
Rate (r) = 8% or 0.08
Time (t) = 5 years
Formula: PV = FV / (1 + r)^t

PV = 15,000 / (1.08)^5 = 15,000 / 1.46933 = $10,209.79

c) Future Value of Annuity (Annual Deposits)

Annual deposit (PMT) = $1,800
Rate (r) = 8% or 0.08
Time (t) = 30 years
Formula:
FV = PMT × [(1 + r)^t – 1] / r

FV = 1,800 × [(1.08)^30 – 1] / 0.08
= 1,800 × [10.06266 – 1] / 0.08
= 1,800 × 9.06266 / 0.08
= 1,800 × 113.2833 = $203,910

4. Bank Reconciliation

Bank Statement Balance = $680

Outstanding checks: -$112

Deposit in transit: +$60
→ Adjusted Bank Balance = $628

Checkbook Balance = $642

Bank fees: -$12
ATM withdrawals not recorded: -$80

Interest earned: +$8
Direct deposits: +$70
→ Adjusted Checkbook Balance = $628

✅ Balances match: $628

CASE ANALYSIS: FINANCIAL SERVICES OPTIONS (30 points)

R1. Benefits and Drawbacks of Financial Services

Mobile Banking:

Benefits: Convenience, real-time account access, ability to deposit checks and transfer money; great for busy families and frequent travelers.
Drawbacks: Requires reliable internet and device access; risk of cyber threats if not properly secured.

Prepaid Debit Cards:

Benefits: Helps control spending; useful for teens; no overdraft fees; doesn’t require a bank account.
Drawbacks: May include activation, transaction, and reload fees; limited consumer protections; not ideal for direct deposits or long-term savings.

Check-Cashing Outlets:

Benefits: Fast access to funds without a bank account; open longer hours than banks.
Drawbacks: High fees (2-5% per check); lack of saving or credit services; not secure or cost-effective for regular use.

R2. Factors the Johnson Family Should Consider

General Considerations:

Fee structures (monthly, overdraft, service)
Access to ATMs or branches
Mobile features and app usability
Interest rates on savings
Customer service availability

Specific to Their Situation:

Need for convenience while traveling (mobile access)
Security and fraud protection (strong privacy policies)
Flexible account types (low/no minimum balances)
Tools for teenagers (like budgeting apps or teen accounts)

R3. Recommended Research Actions

Compare account offerings from traditional banks, credit unions, and online-only banks.
Read reviews about customer satisfaction and app functionality.
Review fee schedules for hidden or recurring charges.
Verify FDIC or NCUA insurance to ensure protection of funds.
Security steps:
- Choose services offering multi-factor authentication
- Use secure networks and biometric logins
- Educate the family about phishing and scams

They should also speak with a representative from any institution to get clarity on features and protections available.