Suppose you buy a CD for $400 that earns 2.5% APR and is compounded quarterly. The CD matures in 5 years. If funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest.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?

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Answer 1 · 2018-02-08T08:10:01

See a step process below;

#A=(P+R/100)^t#, #t# for #tyrs#

The early withdrawal fee #rArr 3 "months interest" = "Interest in the first quarter of the year"#

#"Amount at the end of 1st quarter" = P(1+r/(4 xx 100))^t#

Where;

#t =1# (at first quarter)

A at #1/4= P(1 + r/(4 xx 100))#

#A = 400(1+2.5/400)#

#A = 400(1.00625)#

#A = $402.5#

Recall;

#A = P + I#

#I=402.5 - 400#

#I = $2.5#

Therefore the early withdrawal fee is #$2.5#

Hope this helps!