Question

Suppose you buy a CD for $250 that earns 3% APR and is compounded quarterly. The CD matures in 5 years. Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months interest. What is the early withdrawl fee on this account? A. $1.88 B. $2.25 C. $3.75 D. $3.19

Answer 1

The answer is $1.88

-from an Apex user

Answer 2

Since we are given the annual interest, we are to divide it by the interest period, which is quarterly, or every 3 months. This is done by dividing 3% by 4, which is (0.03/4 = 0.0075). Since the withdrawal fee is 3 months' interest, then we simply have to multiply 0.0075 to the principal amount. This is shown below:

$250 * 0.0075 = 1.875 = 1.88

Therefore, the early withdrawal fee is $1.88.