Question

Eli Sarissian has $9,000 on deposit in a 1-year Super Saver Time-Deposit account. His contract with the bank states that he will be penalized 3 months' interest if he withdraws any part of his deposit before the end of 1 year. Find the amount of the penalty if Eli withdraws $5,000 early and the penalty is figured at 7% a year. a) $525 b) $35 c) $2,625 d) $1,225

Answer 1

The amount of the penalty if Eli withdraws $5,000 early and the penalty is figured at 7% a year is $87.50, so none of the given option is correct.

Step-by-step explanation:

To find the amount of the penalty that Eli will incur for withdrawing $5,000 early, we need to calculate 3 months' worth of interest on that amount.

Here's how we'll do it step by step:

Step 1: Identify the annual interest rate.
The annual interest rate given is 7%, which we can write as a decimal by dividing 7 by 100. So the interest rate is 0.07.

Step 2: Calculate the interest for the entire year.
If Eli were to leave the $5,000 in the account for a full year at a 7% interest rate, he would earn:

Interest for 1 year = Principal amount × Interest rate
Interest for 1 year = $5,000 × 0.07

Step 3: Convert the annual interest rate to the monthly rate.
Since the interest is compounded annually but we are only looking for a penalty for 3 months, we need to find out what 3 months of interest would be.

One year has 12 months, so if we want the monthly interest rate, we divide the annual rate by 12:

Monthly interest rate = Annual interest rate ÷ 12
Monthly interest rate = 0.07 ÷ 12

Step 4: Calculate the interest for 3 months.
We will multiply the monthly interest rate that we derived in Step 3 by the principal amount taken out ($5,000), and then multiply that by the number of months (3) to find the penalty interest:

Penalty = Principal amount × (Monthly interest rate) × Number of months
Penalty = $5,000 × (0.07 ÷ 12) × 3

Step 5: Combine the values and calculate the penalty.
Now we are ready to put the values together and calculate the exact amount of the penalty.

Penalty = $5,000 × (0.07 ÷ 12) × 3
Penalty = $5,000 × (0.0058333…) × 3
Penalty = $5,000 × 0.0174999…
Penalty ≈ $87.50

So, the penalty Eli would incur for withdrawing $5,000 from his deposit account three months early at an annual interest rate of 7% is approximately $87.50.

However, none of the choices a) $525, b) $35, c) $2,625, or d) $1,225 are close to the calculated value of $87.50. It appears there might be a mistake in the given answer choices or in the calculation.