Early withdrawal fee for compound interest CD investment

Question

Suppose you buy a CD for $1000 that 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 Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest. What is the early withdrawal fee on this account?

\$1.25
\$3.75
\$3.13
\$6.25

Please avoid titles in full caps, also try to make your titles hint on the content of the post. — Asaf Karagila, Dec 18 '12 at 00:17
Wouldn't the amount depend on when the early withdrawal occurred? (One of the choices gives the smallest possible value it could be.) — David Mitra, Dec 18 '12 at 00:49

score 1 · Answer 1 · answered Dec 18 '12 at 00:16

1

Hint: If you ignore the compounding, how much interest is collected in one year? How much is one quarter of that?

answered Dec 18 '12 at 00:16

Ross Millikan

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Early withdrawal fee for compound interest CD investment

1 Answers1