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 Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest.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

D. $3.75

Explanation:

Quiz Verified

Answer 2

The correct option is D. $3.75

Explanation:

Principal Value, P = $500

Rate of interest, r = 3%

= 0.03

Time, t = 3 months

`\implies Time = (3)/(12)=(1)/(4)\text{ years}`

n = number of times the interest is compounded

⇒ n = 4

`Amount = P\cdot (1+(r)/(n))^(n* t)\\\\\implies Amount=500\cdot (1+(0.03)/(4))^{4* (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