For amounts between $10,000 and $24,999, a credit union pays a rate of 2.5% on term deposits with maturities in the 91- to 120-day range. However, early redemption will result in a rate of 1.75% being applied. How much more interest will a 91-day $20,000 term deposit earn if it is held until maturity than if it is redeemed after 80 days?
I1 = Po*r*t=20000*(0.025/365)*91=124.66
I2 = 20000*(0.0175/365)*80 = 76.71
I1-I2 = 124.66-76.71 = $47.95 More
To find out how much more interest the 91-day $20,000 term deposit will earn if it is held until maturity compared to being redeemed after 80 days, we need to calculate the interest earned in each scenario.
First, let's calculate the interest earned if the deposit is held until maturity (91 days) at a rate of 2.5%. The formula to calculate simple interest is:
Interest = Principal × Rate × Time
Principal = $20,000
Rate = 2.5% (or 0.025 as a decimal)
Time = 91 / 365 (since the rate is given on an annual basis)
Interest = $20,000 × 0.025 × (91/365)
Interest = $125
So, if the $20,000 deposit is held until maturity (91 days), it will earn $125 in interest.
Next, let's calculate the interest earned if the deposit is redeemed after 80 days (before maturity) at a rate of 1.75%. Using the same formula:
Principal = $20,000
Rate = 1.75% (or 0.0175 as a decimal)
Time = 80 / 365 (since the rate is given on an annual basis)
Interest = $20,000 × 0.0175 × (80/365)
Interest = $76.71
If the $20,000 deposit is redeemed after 80 days, it will earn $76.71 in interest.
Therefore, by holding the deposit until maturity (91 days), you would earn an additional interest of $125 - $76.71 = $48.29 compared to redeeming it after 80 days.