Question

Tony invested $5,500 in a four-year CD that paid 4.8% interest, but later needed to withdraw $475 early. If the CD’s penalty for early withdrawal was three months’ worth of interest on the amount withdrawn, how much of a penalty did Tony pay?

Answer 1

16.50 dollars is the amount of penalty Tony will pay for his early withdrawal.

Solution:

Step 1: Multiply 5500 dollars by 0.048 (interest rate)= Ans. 264 dollars
Step 2: Divide 264 dollars (product in step 1) by 48 months (4 years)= Ans. 5.5 dollars per month
Step 3: Multiply 5.5 dollars per month (quotient in step 2) by 3 months
Step 4: Answer is 16.50 dollars as penalty