Question

Orlando invested $16,000 in an eight-year CD bearing 6.5% interest, but needed to withdraw $3,500 after five years. If the CD’s penalty for early withdrawal was one year’s worth of interest on the amount withdrawn, when the CD reached maturity, how much less money did Orlando earn total than if he had not made his early withdrawal?
a.
$227.50
b.
$682.50
c.
$910.00
d.
$455.00

Answer 1

The real correct answer is C. $190.00

Answer 2

B is the correct answer. Firstly, you have to work out the amount of interest earned per year by multiplying the sum invested ($16,000) by the interest rate (6.5%, or 0.065). Then multiply the result by eight to find out how much money Orlando would get when the CD reaches maturity if he doesn't withdraw any money. To calculate interest when money is withdrawn, multiply the annual interest by five, to work out how much interest Orlando earns in the first five years. Then work out the interest on the reduced investment ($16,000 - $3,500) in the same way and multiply by three to calculate the remaining three years' interest. Add the total interest for three years to the total interest to five years, which will tell you how much interest Orlando recieves when he makes the withdrawal. Finally, you can now take this away from the interest he would have made if he had not made a withdrawal, and this will tell you the difference.