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Suppose you buy a CD for $400 that earns 2.5% 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 Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months'
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Suppose you buy a CD for $400 that earns 2.5% 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 Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest.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 withdrawal fee on this account?

A. $6.25
B. $2.50
C. $1.25
D. $3.13

User Dors
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2 Answers

7 votes

The answer is $2.50

User Bigerock
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1 vote
The withdrawal fee will not take the compund rate, so, you should apply the usual formula for not compound rate,
400⋅0.025/12⋅3=2.50

Where we divide the APR to adapt to a monthly base, and then multiply the number of months.
User Henry Yik
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8.5k points
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