Posted by Sat on Thursday, July 23, 2009 at 6:07pm.
Suppose that the current rates on 60 and 120day GICs(Guaranteed Investment Certificates) are 5.50% and 5.75%, respectively. An investor is weighing the alternatives of purchasing a 120day GIC versus purchasing a 60day GIC and then reinvesting its maturity value in a second 60day GIC. What would the interest rate on 60day GICs have to b 60 days from now for the investor to end up in the same financial position with either alternative?

math(simple interest)  MathMate, Thursday, July 23, 2009 at 7:39pm
Since they are short term instruments, they pay simple interest.
$1000 invested in a 120 day GIC collects insterest of the amount
I1=1000*0.0575*120/365=$18.90411
$1000 invested in a 60 day GIC collects interest
I2=1000*0.0550*60/365=$9.041096
Therefore the amount needed for the next 60 days
= $18.90411  $9.041096
= $9.86301
Effective interest rate
= 9.86301/60*365/1000
= 0.06
It will require 6% interest for the GIC for the next 60 days to catch up with the equivalent of the 120day GIC.
Answer This Question
Related Questions
 math(application of simple interest)  Suppose that the current rates on 60 and...
 finance  Rob has $1,000 to invest for 120 days and is considering two options. ...
 PreCalculus  How to solve this problem by using logarithm: David inherits $...
 Compound Interest  A bank offers a rate of 5.3% compounded semiannually on its...
 compounded interest  A bank offers a rate of 5.3% compounded semiannually on ...
 math & finance  A bank offers a rate of 5.3% compounded semiannually on its ...
 Business Math  An investor has $ 500000 to spend. There investments are being ...
 Business Math  An investor has $ 500000 to spend. There investments are being ...
 Business Math  An investor has $ 500000 to spend. There investments are being ...
 Business Math  An investor has $ 500000 to spend. There investments are being ...
More Related Questions