Chapter 12 - Managing and Pricing Deposit Services

CHAPTER 12
MANAGING AND PRICING DEPOSIT SERVICES
Goal of This Chapter: This chapter has multiple goals. ne of the most important is to learn
a!out the different t"pes of deposits financial institutions offer and# from the perspective of a
manager# to discover $hich t"pes of deposits are among the most profita!le to offer their
customers. %e also $ant to e&plore ho$ an institution's cost of funding can !e determined and
e&amine the different methods open to institutions to price the deposits and deposit-related
services the" sell to the pu!lic.
(e" Topics in This Chapter
T"pes of Deposit )ccounts ffered
The Changing Mi& of Deposits and Deposit Costs
Pricing Deposit Services
Conditional Deposit Pricing
*ules for Deposit +nsurance Coverage
Disclosure of Deposit Terms
,ifeline -an.ing
Chapter utline
+. +ntroduction: The +mportance of Deposits and the Challenge of Managing Deposits
++.T"pes of Deposits ffered !" -an.s and ther Depositor" +nstitutions
). Transaction /Pa"ments or Demand0 Deposits
1. 1oninterest--earing Transaction Deposits
2. +nterest--earing Transaction Deposits
a. 1% )ccounts
!. Mone" Mar.et Deposit )ccounts /MMD)s0
c. Super 1%s
-. 1ontransaction /Savings or Thrift0 Deposits
1. Pass!oo. Savings Deposits
2. Statement Savings Deposits
2. Time Deposits
C. *etirement Savings Deposits
1. +ndividual *etirement )ccounts /+*)s0
2. (eogh Plans
2. *oth +*)s
12-1
Chapter 12 - Managing and Pricing Deposit Services
+++. +nterest *ates ffered on Different T"pes of Deposits
). The Composition of Deposits
1. Trend to$ard +nterest--earing and 1ontransaction Deposits
2. The +mportance of Core Deposits
2. Changes in the *elative +mportance of ther T"pes of Deposits
-. The $nership of Deposits
C. Cost of Different Deposit )ccounts
+3. Pricing Deposit-*elated Services
3. Pricing Deposits at Cost Plus Profit Margin
). 4stimating Deposit Service Costs
-. )n 4&ample of Pooled 5unds Costing
3+. 6sing Marginal Cost to Set +nterest *ates on Deposits
). Conditional Pricing
3++. Pricing -ased on the Total Customer *elationship and Choosing a Depositor"
). The *ole That Pricing and ther 5actors Pla" %hen Customers Choose a Depositor"
+nstitution to 7old Their )ccounts
3+++. -asic /,ifeline0 -an.ing: (e" Services for ,o$-+ncome Customers
+8. Summar" of the Chapter
Concept Chec.s
12-1. %hat are the ma9or t"pes of deposit plans that depositor" institutions offer toda":
Deposit plans can !e divided !roadl" into transaction deposits# thrift or nontransaction deposits#
and h"!rid deposits. The primar" function of transaction deposits is to ma.e pa"ments and these
deposits include regular chec.ing accounts and 1% accounts. The principal function of thrift
deposits is to serve as accumulated savings and include pass!oo. and statement savings
accounts# CDs# and other time deposit accounts. 7"!rid deposits com!ine transactions and thrift
features and include mone"-mar.et deposit accounts and Super 1%s.
12-2. %hat are core deposits# and $h" are the" so important toda":
Core deposits are the most sta!le components of a depositar" institution's funding !ase and
usuall" include smaller-denomination savings and third-part" pa"ments accounts. The" are
characteri;ed !" relativel" lo$ interest-rate elasticit". 7olding a su!stantial proportion of core
deposits has an advantage in having access to a sta!le and cheaper source of funding $ith
relativel" lo$ interest-rate ris..
12-2. 7o$ has the composition of deposits changed in recent "ears:
There has !een a shift in the pu!lic's holdings of deposits to$ard greater relative proportions of
the highest-"ielding time deposits and to$ard h"!rid accounts that ma&imi;e depositor returns#
$hile still giving them access to deposited funds to ma.e pa"ments.
12-2
Chapter 12 - Managing and Pricing Deposit Services
12-<. %hat are the conse=uences for the management and performance of depositor"
institutions resulting from recent changes in deposit composition:
%hile depositor" institutions $ould prefer to sell onl" the cheapest deposits to the pu!lic# it is
predominatel" pu!lic preference that determines $hich t"pes of deposits $ill !e created.
+nstitutions that do not $ish to conform to customer preferences $ill simpl" !e out!id for
deposits !" those $ho do. Managers $ho fail to sta" a!reast of changes in their competitors'
deposit pricing and mar.eting programs stand to lose !oth customers and profits.
12->. %hich deposits are the least costl" for depositor" institutions: The most costl":
Commercial chec.a!le deposits# particularl" regular noninterest !earing demand deposits# are
usuall" the least costl". The most costl" deposits are pass!oo. savings accounts having
su!stantial deposit and $ithdra$al activit" and higher interest-rate time deposits.
12-?. Descri!e the essential differences !et$een the follo$ing deposit pricing methods in use
toda": cost-plus pricing# conditional pricing# and relationship pricing.
Cost-plus deposit pricing encourages !an.s to determine $hat costs the" are incurring in la!or
and management time# materials# etc.# in offering each deposit service. Cost-plus pricing
generall" calls for a !an. to charge deposit service fees ade=uate to cover all the costs of offering
the service plus a small margin for profit. Conditional pricing is used toda" as a tool !" !an.s to
attract the .inds of depositors the" $ant to have as customers. %ith this pricing techni=ue a !an.
$ill post a schedule of offered interest rates or fees assessed for deposits of var"ing si;es and
!ased on account activit". Generall" larger volume deposits carr" higher interest returns to the
depositor or are assessed lo$er service charges# encouraging customers to hold a high average
deposit !alance $hich gives the !an. more funds to invest in earning assets. 5inall"# relationship
pricing involves !asing fees charged a customer on the num!er of services and the intensit" of
use of services the customer purchases from a !an..
12-@. ) !an. determines from an anal"sis of its cost-accounting figures that for each A>BB
minimum-!alance chec.ing account it sells account processing and other operating costs $ill
average A<.C@ per month and overhead e&penses $ill run an average of A1.21 per month. The
!an. hopes to achieve a profit margin over these particular costs of 1B percent of total monthl"
costs. %hat monthl" fee should it charge a customer $ho opens one of these chec.ing accounts:
The relevant formula is:
6nit Price perating verhead Planned
Charged D 4&pense E 4&pense E Profit Margin
per Month Per 6nit Per 6nit Per 6nit
+n this case:
12-2
Chapter 12 - Managing and Pricing Deposit Services
6nit Price Charged Per Month D A<.C@ E A1.21 E B.1B & /A<.C@ E A1.210 D A?.?F
12-C. To price deposits successfull"# service providers must .no$ their costs. 7o$ are these
costs determined using the historical average cost approach: The marginal cost of funds
approach: %hat are the advantages and disadvantages of each approach:
The historical average cost approach loo.s at the past. +t as.s the follo$ing =uestion:
%hat funds has the !an. raised to date and $hat did the" cost: The marginal cost deposit-pricing
method focuses upon the $eighted average cost of ne$ funds raised from all of the different
sources of funds the !an. dra$s upon or plans to dra$ upon in the current period.
Marginal cost is preferred over historical average cost as fre=uent changes in interest rates $ill
ma.e historical average cost a treacherous standard for pricing.
12-F. 7o$ can the historical average cost and marginal cost of funds approaches !e used to
help select assets /such as loans0 that a depositor" institution might $ish to ac=uire:
The historical average cost rate is called !rea.-even !ecause the institution must earn at least this
rate on its earning assets /primaril" loans and securities0 9ust to meet the total operating costs of
raising !orro$ed funds and the stoc.holdersG re=uired rate of return. Therefore# the institution
$ill .no$ the lo$est rate of return that it can afford to earn on assets it might $ish to ac=uire.
The marginal cost of funds approach can !e used as a guide to select loans and other assets
!ecause the institution interested in profit ma&imi;ing $ould $ant to !e sure to cover its fund-
raising costs.
12-1B. %hat factors do household depositors ran. most highl" in choosing a financial firm for
their chec.ing account: Their savings account: %hat a!out !usiness firms:
Studies cited in this chapter indicate that households /individuals and families0 appear to
consider# in ran. order# the follo$ing factors in choosing an institution to hold their chec.ing
account: convenient location# availa!ilit" of other services# safet"# lo$ fees and lo$ minimum
!alances# and high deposit interest rates. +n selecting an institution to hold their savings account
households appear to consider# in ran. order: familiarit"# interest rate paid# transactional
convenience# location# availa!ilit" of pa"roll deduction# and an" fees charged. -usiness firms# on
the other hand# seem to consider such factors as the financial health of the lending institution#
$hether the institution $ill !e a relia!le source of credit in the future# the =ualit" of managers#
$hether loans are competitivel" priced# the =ualit" of financial advice given# and $hether cash
management and operations services are provided.
12-11. %hat does the 1FF1 Truth in Savings )ct re=uire financial firms selling deposits inside
the 6nited States to tell their customers:
12-<
Chapter 12 - Managing and Pricing Deposit Services
The Truth in Savings )ct re=uires financial firms to full" inform their deposit customers on the
terms offered to each depositor. The customer must !e told $hen a ne$ account is opened or if a
deposit is rene$ed# $hat annual percentage "ield /)PH0 is !eing offered and $hat minimum
!alance is re=uired to receive that "ield. Moreover# the depositor must !e informed a!out an"
penalties or service fees $hich could reduce his or her e&pected "ield. +f the terms of a deposit
are changed in a $a" that $ould reduce the depositorGs return advance notice must !e given to
the account holder.
12-12. 6se the )PH formula re=uired !" the Truth in Savings )ct for the follo$ing calculation.
Suppose that a customer holds a savings deposit in a savings !an. for a "ear. The !alance in the
account stood at A2#BBB for 1CB da"s and A1BB for the remaining da"s in the "ear. +f the Savings
!an. paid this depositor AC.>B in interest earnings for the "ear# $hat )PH did this customer
receive:
The correct formula is:
1
]
1

+ 1 - 0
-alance )ccount )verage
4arned +nterest
/1 1BB )PH
Period in Da"s
2?>
+n this instance#
1
]
1

+ 1 - 0
A1B2?.FF
AC.>B
/1 1BB )PH
2?>
2?>
r
)PH D B.C2 percent#
%here the average account !alance is:
A1B2?.FF
da"s 2?>
da"s 1C> & A1BB da"s 1CB & A2BBB

+
12-12. %hat is lifeline !an.ing: %hat pressures does it impose on the managers of !an.s and
other financial institutions:
12->
Chapter 12 - Managing and Pricing Deposit Services
,ifeline !an.ing consists of !asic service pac.ages offered !" !an.s to customers not generall"
a!le to afford conventional !an. service offerings. The essence of these services is that the"
carr" lo$ service fees and usuall" do not offer all of the features of !an.ing services carr"ing
full service fees. The pressure on managers to offer !asic or lifeline services has aroused a !ig
controvers". 5rom a profit motive point of vie$ !an.s should not offer unprofita!le services. n
the other hand# financial institutions are partiall" su!sidi;ed !" government in the form of lo$-
interest loans and deposit insurance and# therefore# have some pu!lic-service responsi!ilities
$hich ma" include providing certain !asic services to all potential customers# regardless of their
income or social status.
12.1<. Should lifeline !an.ing !e offered to lo$-income customers: %h" or $h" not:
This is not an eas" =uestion to ans$er. ne of the most serious pro!lems individuals outside the
financial mainstream face is lac. of access to a deposit account. ,ifeline !an.ing is providing
!asic !an.ing services to these individuals. Most financial-service providers are privatel" o$ned
corporations responsi!le to their stoc.holders to earn competitive returns on invested capital.
Providing financial services at prices so lo$# the" do not cover production costs interferes $ith
that important goal. Thus# from a profit motive point of vie$ !an.s should not offer unprofita!le
services. 7o$ever# it should !e considered that depositor" institutions receive important aid from
the government that grants them a competitive advantage over other financial institutions li.e
deposit insurance. Therefore# the" have some pu!lic-service responsi!ilities $hich ma" include
providing certain !asic services to all potential customers.
Pro!lems
12-1. *hinestone 1ational -an. reports the follo$ing figures in its current *eport of
Condition:
Cash and +nter!an. Dep >B Core Deposits >B
S.T. Securities 1> ,arge 1egotia!le CDs 1>B
Total ,oans# gross <BB -ro.ered Deposits ?>
,.T. Securities 1>B ther Deposits <>
ther )ssets 1B Mone" M.t. ,ia!ilities 1F>
Total )ssets ?2> ther ,ia!ilities ?>
4=uit" Capital >>
Total ,ia!. I 4=. ?2>
[NOTE: The balance sheet in the Text/PDF does not tally. The error in the value of Other
iabilities! has been corrected in the "#.$
a. 4valuate the funding mi& of deposits and nondeposit sources of funds emplo"ed !"
*hinestone. Given the mi& of its assets# do "ou see an" potential pro!lems: %hat changes $ould
"ou li.e to see management of this !an. ma.e: %h":
12-?
Chapter 12 - Managing and Pricing Deposit Services
Core depositsJ)ssets D C.BBK
,arge 1egotia!le CDsJ)ssets D 2<.BBK
-ro.ered DepositsJ)ssets D 1B.<BK
ther DepositsJ)ssets D @.2K
Mone" Mar.et ,ia!ilitiesJ)ssets D 21.2K
ther ,ia!ilitiesJ)ssets D 1B.<BK
4=uit" CapitalJ)ssets D C.CBK
The proportion of core deposits at *hinestone is e&ceptionall" lo$# $hile large CDs and other
mone"-mar.et !orro$ings ma.e up more than >< percent of the !an.'s total funding sources.
This funding mi& tends to su!9ect the !an. to e&cessive vulnera!ilit" to =uic. $ithdra$al of
funds and high interest-rate ris. e&posure. *hinestone also appears to !e e&cessivel" dependent
on !ro.ered deposits $hich are highl" volatile and interest-sensitive. )dding in these !ro.ered
deposits# more than half of *hinestone's assets are funded $ith highl" interest-sensitive deposits
and mone"-mar.et !orro$ings. Management needs to e&pand the !an.'s core deposits and other
more sta!le funds sources.
!. Suppose mar.et interest rates are pro9ected to rise significantl". Does *hinestone appear to
face significant losses due to li=uidit" ris.: Due to interest rate ris.: Please !e as specific as
possi!le.
+f interest rates rise# *hinestone $ill e&perience higher interest costs immediatel" or $ithin hours
or a fe$ da"s on at least >B percent of its funding sources. 6nfortunatel" all !ut A?> million of
its A?2> million in total assets are longer-term# infle&i!le assets $hose interest "ields cannot !e
ad9usted as rapidl" as the interest rates to !e paid out on the !an.'s lia!ilities. ther factors held
e=ual# the !an.'s earnings $ill !e s=uee;ed. Management needs to do some serious restructuring
$or. on !oth sides of the !an.'s !alance sheet in moving to$ard more fle&i!le-return assets and
more fle&i!le-cost lia!ilities# and to move to$ard greater use of interest-rate hedging techni=ues.
12-2. (ale$ood Savings -an. has e&perienced recent changes in the composition of its deposit
/see the follo$ing ta!leL all figures in millions of dollars0. %hat changes have recentl" occurred
in (ale$ood's deposit mi&: Do these changes suggest possi!le pro!lems for management in
tr"ing to increase profita!ilit" and sta!ili;e earnings:
12-@
Chapter 12 - Managing and Pricing Deposit Services
Types of Deposits Held
This
Yea
O!e
Yea
A"o
T#o
Yeas
A"o
Thee
Yeas
A"o
*egular and special chec.ing accounts A22> A2F< A22@ A2@C
+nterest-!earing chec.ing accounts 2F2 2>C 22F 2C@
*egular /pass!oo.0 savings deposits >B1 >F? ?<? @BF
Mone" mar.et deposit accounts C?2 C12 @<F @2>
*etirement deposits ?>B ?B2 ><2 <FC
CDs under A1BB#BBB 22@ 2FC 2?1 2<<
CDs A1BB#BBB and over ?B? >C@ >22 <F>
*egular and special chec.ing accounts have declined sharpl" from A2@C million to A22> million#
$hile interest-!earing chec.ing accounts rose from A2C@ million to A2F2 million. Pass!oo.
savings deposits have fallen !" more than A2BB million $hile mone"-mar.et deposit accounts#
retirement accounts# and !oth small and large /A1BB#BBB E0 CDs have all risen su!stantiall".
Management has several reasons to !e concerned a!out these developments !ecause the !an.'s
funds are shifting into accounts !earing significantl" higher interest costs# $hile the !an. is
suffering su!stantial erosion in its core deposits represented !" regular /pass!oo.0 savings
deposits and small chec.ing accounts. Thus# more interest-sensitive funds are supplanting
deposits that are more lo"al and less interest-elastic. The !an. ma" find its profits are li.el" to !e
s=uee;ed !" higher interest costs and its earnings ma" !ecome more volatile if mar.et interest
rates e&perience significant changes in the period ahead !ecause a greater portion of the !an.'s
funding is coming from more interest-sensitive deposits. ) possi!le offsetting advantage is the
shift a$a" from deposits that can !e $ithdra$n $ithout notice /i.e.# regular and special chec.ing
accounts and pass!oo. savings deposits0 to$ard longer-term deposit instruments $ith fi&ed
maturities# giving the !an. a some$hat longer term and# perhaps# some$hat more predicta!le
funding !ase.
12-2. 5irst Metrocentre -an. posts the follo$ing schedule of fees for its household and small-
!usiness transaction accounts:
5or average monthl" account !alances over A1#>BB there is no monthl" maintenance fee
and no charge per chec. or other draft.
5or average monthl" account !alances of A1#BBB to A1#>BB# a A2 monthl" maintenance
fee is assessed and there is a 1BM charge per chec. or charge cleared.
5or average monthl" account !alances of less than A1#BBB# a A< monthl" maintenance fee
is assessed and there is a 1>M per chec. or per charge fee.
%hat form of deposit pricing is this: %hat is 5irst Metrocentre tr"ing to accomplish $ith its
pricing schedule: Can "ou foresee an" pro!lems $ith this pricing plan:
12-C
Chapter 12 - Managing and Pricing Deposit Services
5irst Metrocentre -an. has posted a schedule of deposit fees that allo$s the customer service-
charge free chec.ing for average monthl" account !alances over A1#>BB. ,o$er !alances are
assessed an inverse monthl" maintenance fee plus an increased per-chec. charge as the average
monthl" account !alance falls. This is conditional deposit pricing designed to encourage more
sta!le# larger-denomination accounts $hich $ould give the !an. more mone" to use and#
perhaps# a more sta!le funding !ase. The fees on under-A1#BBB accounts are stiff $hich ma"
drive a$a" man" small depositors to other !an.s.
12.<. Gold Mine Pit Savings )ssociation finds that it can attract the follo$ing amounts of
deposits if it offers ne$ depositors and those rolling over their maturing CDs the interest
rates indicated !elo$:
4&pected 3olume
of 1e$ Deposits
*ate of +nterest
ffered Depositors
A1B million 2.BBK
1> million 2.2>
2B million 2.>B
2? million 2.@>
2C million <.BB
Management anticipates !eing a!le to invest an" ne$ deposits raised in loans "ielding ?.2>
percent. 7o$ far should this thrift institution go in raising its deposit interest rate in order to
ma&imi;e total profits /e&cluding interest costs0:
4&pected
+nflo$s
*ate
ffered
on 1e$
5unds
Total
+nterest
Cost
Marginal
+nterest
Cost
Marginal
Cost *ate
Marginal
*evenue
*ate
4&p. Diff.
+n Marg.
*ev and
Cost
Total
Profits
4arned
A1B 2.BK B.2BBB B.2BBB 2.BBBK ?.2>K E2.2>BK AB.22>B
1> 2.2> B.<C@> B.1C@> 2.@>B ?.2> E2.>BB AB.<>BB
2B 2.>B B.@ B.212> <.2>B ?.2> E2.BB AB.>>BB
2? 2.@> B.F@> B.2@> <.>C2 ?.2> E1.??@ AB.?>BB
2C <.BB 1.12 B.1<> @.2>B ?.2> -1.BB AB.?2BB
Gold Mine Pit Savings )ssociation should raise its deposit rate to 2.@>K# attracting A2? million
in ne$ depositsL !ecause up to that point the marginal revenue rate is greater than the marginal
cost rate and total profits are also rising. )t <.BK# the marginal cost rate is greater than the
marginal revenue rate and total profits have fallen from a high of AB.?> million !ac. do$n to
AB.?2 million.
12-F
Chapter 12 - Managing and Pricing Deposit Services
12$>. *ed -ric. -an. plans to launch a ne$ deposit campaign ne&t $ee. in hopes of !ringing
in from A1BB million to A?BB million in ne$ deposit mone"# $hich it e&pects to invest at a >.>
percent "ield. Management !elieves that an offer rate on ne$ deposits of 2.@> percent $ould
attract A1BB million in ne$ deposits and rollover funds. To attract A2BB million# the !an. $ould
pro!a!l" !e forced to offer 2.2> percent. *ed -ric.'s forecast suggests that A2BB million might
!e availa!le at 2.@> percent# A<BB million at <.BB percent# A>BB million at <.2> percent# and A?BB
million at <.> percent. %hat volume of deposits should the institution tr" to attract to ensure that
marginal cost does not e&ceed marginal revenue:
4&pected
+nflo$s
*ate
ffered
on 1e$
5unds
Total
+nterest
Cost
Marginal
+nterest
Cost
Marginal
Cost *ate
Marginal
*evenue
*ate
4&p. Diff.
+n Marg.
*ev and
Costs
Total
Profits
4arned
A1BB 2.@>K 2.@> 2.@> 2.@>K >.>BK E2.@>K A2.@>
A2BB 2.2>K ?.>B 2.@> 2.@>K >.>BK E1.@>K A<.>B
A2BB 2.@>K 11.2> <.@> <.@>K >.>BK EB.@>K A>.2>
A<BB <K 1?.BB <.@> <.@>K >.>BK EB.@>K A?.BB
A>BB <.2>K 21.2> >.2> >.2>K >.>BK EB.2>K A?.2>
A?BB <.>K 2@.BB >.@> >.@>K >.>BK -B.2>K A?.BB
The marginal revenue rate is greater than the marginal cost rate up to A>BB million in ne$
deposits. )t A?BB million# the marginal cost rate of >.@>K is greater than the marginal revenue
rate of >.>BK. Therefore# *ed -ric. -an. should tr" and attract A>BB million in ne$ deposits.
12-?. *ichman Savings -an. finds that its !asic transaction account# $hich re=uires a A<BB
minimum !alance# costs this savings !an. an average of A2.?> per month in servicing costs
/including la!or and computer time0 and A1.1C per month in overhead e&penses. The savings
!an. also tries to !uild in a AB.>B per month profit margin on these accounts. %hat monthl" fee
should the !an. charge each customer:
5ollo$ing the cost-plus-profit approach# the monthl" fee should !e:
Monthl" fee D A2.?> E A1.1C E AB.>B D A<.22 per month.
5urther anal"sis of customer accounts reveals that for each A1BB a!ove the A>BB minimum in
average !alance maintained in its transaction accounts# *ichman Savings saves a!out > percent
in operating e&penses $ith each account. /1ote: +f the !an. saves a!out > percent in operating
e&penses for each A1BB held in !alances a!ove the A>BB minimum# then a customer maintaining
an average monthl" !alance of A1#BBB should save the !an. 2> percent in operating costs.0 5or a
customer $ho consistentl" maintains an average !alance of A1#BBB per month# ho$ much should
the !an. charge in order to protect its profit margin:
The appropriate fee for this customer $ould !e:
12-1B
Chapter 12 - Managing and Pricing Deposit Services
NA2.?> -B.2> /A2.?>0O E A1.1C E AB.>B D A1.FC@> E A1.1C E AB.>B D A2.??@> per month.
12-@. Monica ,ane maintains a savings deposit $ith Monarch Credit 6nion. This past "ear
Monica received A1B.@> in interest earnings from her savings account. 7er savings deposit had
the follo$ing average !alance each month:
Panuar" A<BB Pul" A2>B
5e!ruar" 2>B )ugust <2>
March 2BB Septem!er >>B
)pril 1>B cto!er ?BB
Ma" 22> 1ovem!er ?2>
Pune 2BB Decem!er 2BB
%hat $as the annual percentage "ield /)PH0 earned on Monica's savings account:
Monica's account had an average !alance this "ear of:
NA<BB & 21 da"s E A2>B & 2C da"s E A2BB & 21 da"s E A1>B & 2B da"s
E A22> & 21 da"s E A2BB & 2B da"s E A2>B & 21 da"s E A<2> & 21 da"s E
A>>B & 2B da"s E A?BB & 21 da"s E A?2> & 2B da"s E A2BB & 21 da"sO
2?> da"s
D A2@2.>?
Then the )PH must !e:
)PH D 1BB
percent 2.88 1 )
$373.56
$10.75
(1
365/365

1
]
1

+
12-C. The 1ational -an. of Ma"ville =uotes an )PH of 2.> percent on a one-"ear mone"
mar.et CD sold to one of the small !usinesses in to$n. The firm posted a !alance of A2#>BB for
the first FB da"s of the "ear# A2#BBB over the ne&t 1CB da"s# and A<#>BB for the remainder of the
"ear. 7o$ much in total interest earnings did this small !usiness customer receive for the "ear:
6sing the )PH formula $e can fill in the varia!les $hose values are .no$n and find the
un.no$n interest earnings. Thus:
)PH D 1BB 1
]
1

+ 1 )
Balance Average
Earnings Interest
(1
365/365
2.>K D 1BB
1
]
1

+ 1 )
$3267.12
Earnings Interest
(1
365/365
12-11
Chapter 12 - Managing and Pricing Deposit Services
%here the accountGs average !alance is found from:
)verage -alance D
[ ]
das 365
das !5 " $#500 das 180 " $3000 das !0 " $2500 + +
D A22?@.12
Then:
2.>K D 1BB
Earnings Interest " 0.030608
$3267.12
Earnings Interest

,
_

or +nterest 4arnings D A11<.2>

12-12