Question

Suppose you buy a CD for $400 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 Assume that if funds are withdrawn before the CD matures, the early withdrawal fee is 3 months' interest.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?

A. $6.25
B. $2.50
C. $1.25
D. $3.13

Answer 1

The answer is $2.50

Answer 2

The withdrawal fee will not take the compund rate, so, you should apply the usual formula for not compound rate,
400⋅0.025/12⋅3=2.50

Where we divide the APR to adapt to a monthly base, and then multiply the number of months.