Question

Irene invested $27,000 in a twelve-year CD bearing 8.0% interest, but needed to withdraw $6,000 after three years. If the CD’s penalty for early withdrawal was eighteen months’ worth of interest on the amount withdrawn, when the CD reached maturity, how much less money did Irene earn total than if she had not made her early withdrawal? a. $3,600 b. $4,320 c. $720 d. $5,040
D IS THE ANSWER

Answer 1

$5,040 since Irene earned nearly earned about $4,800 less than what she would be making if she did not make her early withdrawal.

Answer 2

Answer:

Option D.

Explanation:

It is given that Irene invested $27,000 in a twelve-year CD bearing 8.0% interest.

Total interest = Principal × Rate × Time

Principal = $27,000

Rate = 8% = 0.08

Time = 12 years

$\text{Total interest}=27000\times 0.08\times 12=25920$

Irene earn total $25,920 if she had not made her early withdrawal.

If she withdraw $6000 after three years, then the total interest is

$\text{Total interest}=27000\times 0.08\times 3+(27000-6000)\times 0.08\times (12-3)$

$\text{Total interest}=6480+21000\times 0.08\times 9$

$\text{Total interest}=6480+15120=21600$

If the CD’s penalty for early withdrawal was eighteen months’ worth of interest on the amount withdrawn.

$\text{Penalty}=6000\times 0.08\times \frac{18}{12}=720$

$21600-720=20880$

Irene earn total $20880 if she had made her early withdrawal.

$25920-20880=5040$

Irene earn $5,040 less money if she had made her early withdrawal.

Therefore, the correct option is D.