Interest Penalty Calculation for Certificate of Deposit Withdrawal
How is the interest penalty calculated for early withdrawal from a certificate of deposit?
Scenario:
Suppose you invested $56,000 in a one-year certificate of deposit paying 8.5% interest. After 6 months, you decide to withdraw the full amount. What interest penalty do you pay?
Calculating Interest Penalty:
When you withdraw part of your money from a certificate of deposit before the date of maturity, you are required to pay an interest penalty. In this scenario, the interest penalty is calculated based on the simple interest formula.
Explanation:
To calculate the interest penalty for early withdrawal from the certificate of deposit (CD) with an investment of $56,000 at an interest rate of 8.5% for one year, we need to use the formula for simple interest. The formula for calculating simple interest is I = PRT, where:
- I is the interest amount
- P is the principal amount (initial investment)
- R is the annual interest rate
- T is the time in years
Substituting the given values into the formula:
I = $56,000 * 0.085 * (6/12)
Calculating the above expression gives us an interest penalty of approximately $2,380. This means that by withdrawing your investment halfway through the term, you have to pay an interest penalty of $2,380.