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3 years ago

Suppose you buy a CD for $1000 that earns 2.5% APR and is compounded

Mathematics

1 answer:

labwork [276]3 years ago

7 0

The early withdrawal fee on this account is $6.25

Step-by-step explanation:

Suppose you buy a CD for $1000

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Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest

We need to find the early withdrawal fee on this account

∵ The annual interest is 2.5%

- Change it to decimal

∵ 2.5% = 2.5 ÷ 100 = 0.025

∴ The annual interest rate is 0.025

∵ The interest is compounded quarterly

∴ The interest rate per quarter = 0.025 ÷ 4 = 0.00625

∵ The early withdrawal fee is 3 months' interest

∵ You buy the CD for $1000

∵ A quarter year = 3 months

∴ The early withdrawal fee = 1000 × 0.00625 = $6.25

The early withdrawal fee on this account is $6.25

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