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 Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest.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

Answer:

The correct option is D. $3.75  

Step-by-step explanation:

Principal Value, P = $500

Rate of interest, r = 3%

                          = 0.03

Time, t = 3 months

$\implies Time = \frac{3}{12}=\frac{1}{4}\text{ years}$

n = number of times the interest is compounded

⇒ n = 4

$Amount = P\cdot (1+\frac{r}{n})^{n\times t}\\\\\implies Amount=500\cdot (1+\frac{0.03}{4})^{4\times \frac{1}{4}}\\\\\implies Amount = \ 503.75$

Now, Withdrawal fee = Amount paid - Principal value

⇒ Withdrawal fee = 503.75 - 500

⇒ Withdrawal fee = $3.75

Hence, The correct option is D. $3.75

Answer 2

The question is asking to choose among the following choices that states the early withdrawal fee of the account given in the problem, base on my calculation and further formulation about the said problem, I would say that the answer would be letter D. $3.75. I hope you are satisfied with my answer