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Suppose you buy a CD for $300 that earns 3% 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 Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest. What is the early withdrawal fee on this account?

A. $2.25
B. $6.00
C. $3.75
D. $1.25

Respuesta :

nobillionaireNobley
Value of the CD after 3 months is given by 300(1 + 0.03 / 4) = 300(1 + 0.0075) = 300 x 1.0075 = $302.25.
Therefore, interest for 3 months = $302.25 - $300 = $2.25

The early withdrawal fee is $2.25.

What is the early withdrawal fee?

The early withdrawal fee is equivalent to 3 months' interest.  

3 months' interest = (APR / 12) X 3

= APR / 4

= 3% / 4

= 0.75%

Early withdrawal fee = 0.75 x $300

0.0075 x $300 = $2.25

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