Question

You have $3,750 to deposit. If you deposit the money in a savings account at your local bank, you will earn 1.75% annual interest and will be able to make ATM withdrawals at your bank’s ATMs. If you deposit the money in an online savings account, you will earn 3.25% interest, but you will be charged $4 every time you make an ATM withdrawal. Assuming that your ATM withdrawals do not reduce the amount of interest you earn, roughly how often must you make an ATM withdrawal for the local savings account to be a better deal than the online savings account?
a.
Thirteen times per year
b.
Once per month
c.
Every three weeks
d.
Every two months

Answer 1

Interest difference = 3750*(0.0325−0.0175) = 3750*0.015 = $56.25 per year.
Each ATM withdrawal on the online account costs $4, so break-even withdrawals = 56.25/4 ≈ 14.06 per year. That means if you withdraw about 15 or more times a year the local account is better. "Every three weeks" is ≈ 52/3 ≈ 17.3 withdrawals/year, which exceeds the break-even, so answer: c.