SOLUTION: 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
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Question 1191033: 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 If the CD’s penalty for early withdrawal was one year’s worth of interest on the amount withdrawn, when the CD reached maturity, how much less money did Orlando earn total than if he had not made his early withdrawal? Answer by Theo(13342) (Show Source):
You can put this solution on YOUR website! the investment is 116000 in an 8 year cd at 6.5% simple interest.
the interest on the cd would be p * r * n = 16000 * .065 * 8 = 8320.
if he withdrew 3500 after 5 years with no penalty, then his interest would have been 16000 * .065 * 5 + 12500 * .065 * 3 = 7637.5
the penalty on the withdrawal was one year's worth of interest on the amount withdrawn.
that would be 3500 * .065 = 227.5
subtract that from 7637.5 and he would have made 7410 instead of 7637.5.
i made a chart to show the yearly transactions.
here it is .
if he did not take out the 3500 at the end of year 5, his total interest would have been 8320.
since he took out 3500 at the end of year 5, his total interest with the penalty was 7410.
this was 3 years loss of interest on 3500 each year plus 1 year loss of interest on 3500 because of the penalty = 4 years loss of interest on 3500 each year * .065 * 4 = 910 less interest than if he did not make any withdrawal until the term of the CD was completed.
