Question

Suppose you buy a CD for $500 that earns 3% APR and is compounded quarterly. The CD matures in 3 years. Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest. What is the early withdrawal fee on this account?
A. $5.00
B. $2.50
C. $1.25
D. $3.75

Answer 1

Answer:

The correct option is D. $3.75  

Step-by-step explanation:

Principal Value, P = $500

Rate of interest, r = 3%

                          = 0.03

Time, t = 3 months

$\implies Time = \frac{3}{12}=\frac{1}{4}\text{ years}$

n = number of times the interest is compounded

⇒ n = 4

$Amount = P\cdot (1+\frac{r}{n})^{n\times t}\\\\\implies Amount=500\cdot (1+\frac{0.03}{4})^{4\times \frac{1}{4}}\\\\\implies Amount = \ 503.75$

Now, Withdrawal fee = Amount paid - Principal value

⇒ Withdrawal fee = 503.75 - 500

⇒ Withdrawal fee = $3.75

Hence, The correct option is D. $3.75

Answer 2

Answer:

D. $3.75

Step-by-step explanation:

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