Certificates of deposit (CDs) are short- to medium-term investment instruments issued by banks which provides a fixed rate of interest for a period of time. CDs offer stability in interest earned but have penalty for early withdrawal.
A 1-year CD pays a nominal rate of interest of 8% compounded quarterly. You are offered two options of penalty for early withdrawal:
a) loss of 3-month interest,
b) a reduction in the nominal rate of interest to 6%
if you wish to withdraw after 9 months, which option would you choose?