Question

Orlando invested $16,000 in an eight-year CD bearing 6.5% simple annual interest, but needed to withdraw $3,500 after five years. If the CD’s penalty for early withdrawal was one year’s worth of interest on the amount withdrawn, when the CD reached maturity, how much less money did Orlando earn total than if he had not made his early withdrawal?
a.
$227.50
b.
$682.50
c.
$910.00
d.
$455.00

Answer 1

Without withdrawing: interest = 16,000(.065)(8) = $8,320.

Withdrawing $3,500 after 5 years:
- Interest first 5 years = 16,000(.065)(5) = $5,200.
- Remaining principal = 16,000 − 3,500 = $12,500, interest for last 3 years = 12,500(.065)(3) = $2,437.50.
- Penalty = one year’s interest on $3,500 = 3,500(.065) = $227.50.

Total interest net = 5,200 + 2,437.50 − 227.50 = $7,410.

Difference = 8,320 − 7,410 = $910.

Answer: c. $910.00