Exercise: Bank overdraft fee

The Wall Street Journal published an article called “Why Banks at Wal-Mart Are Among America’s Top Fee Collectors” on May 11, 2014. The article begins as follows:

“On a rainy morning in April, Anna Proctor entered a Wal-Mart Supercenter near some of this city’s poorest areas to get $300 for urgent car repairs—money she didn’t have.

Inside, she joined a line at a Woodforest National Bank branch and intentionally overdrew her account. When her paycheck was deposited 12 days later, she said, the bank would take the borrowed sum plus a $30 fee.”

I use this article to have students calculate the APR and EAR for this overdraft loan by asking the following questions in class:

What’s the period rate for the overdraft?
P0 = 300
P1 = 330
T = 12 days
r: period rate for 12 days (HPR)
r = P1/P0 – 1 = 330/300 – 1 = 0.1 = 10%

What’s the APR?
APR = 10% * 365/12 = 304%

What’s the EAR on the overdraft?
EAR = (1+0.1)365/12 – 1 = 17.16 = 1,716%

 

overdraft_-_punch_cartoon_-_project_gutenberg_etext_16113

“I warn you, Sir! The discourtesy of this bank is beyond all limits. One word more and I – I withdraw my overdraft!”
Cartoon from Punch Magazine Vol. 152, June 27, 1917

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