Question

suppose you buy a CD for $500 that's earns 3% APR and is compounded quarterly. The CD matures in 3 years. Assume that if funds are with drawn before the CD matures, the early withdrawal fee is 3 months interest. what is the early withdrawal fee on this account?

Answer 1

Compounded quarterly means that the interest accrued every 3 months
Or 4 times a year
So the early withdrawal fee on this accoun is
500×0.03×(1÷4)=3.75

Answer 2

The answer is $3.75

Explanation:

P = $500

r = 3% = 0.03

n = 4

t =
`3/12=1/4`

Now compound interest formula is :

`A=P(1+(r)/(n))^(nt)`

Putting the values in formula we get,

`A=500(1+(0.03)/(4))^(4*1/4)`

`A=500(1.0075})^(1)`

= $503.75

Now, withdrawal fee = amount paid - principle

=>
`503.75-500=3.75` dollars.

So, the answer is $3.75.