Question

Three years ago, Jack purchased a $5,600, 3% compounded annually, 5-year CD with all interest reinvested. Suppose interest rates on 2-year CDs are now 4%. If there is a 12-month interest penalty on the original principal for early withdrawal, then Jack will __(gain or lose)_($?)__ in two years from early withdrawal and purchase of the new CD.

please list the calculation procedure

Answer 1

To calculate the value of the CD after 2 years, you need to consider the original CD and the penalty for early withdrawal. Use the compound interest formula to calculate the value of the CDs after 2 years and subtract the penalty from the original CD to determine if Jack will gain or lose.

Step-by-step explanation:

To calculate the value of the CD after 2 years, you need to consider the original CD and the penalty for early withdrawal. Let's break it down step by step:

1. Calculate the value of the original CD after 2 years using the compound interest formula:

Final Value = Principal × (1 + Interest Rate)^Number of Years

1. Calculate the interest penalty for early withdrawal:

Penalty = Principal × Penalty Rate

1. Calculate the value of the new CD after 2 years using the compound interest formula:

Final Value = Principal × (1 + Interest Rate)^Number of Years

1. Subtract the penalty from the value of the original CD and add it to the value of the new CD to find out if Jack will gain or lose in two years.

I hope this helps!