posted by Sat .
Suppose that the current rates on 60- and 120-day GICs(Guaranteed Investment Certificates) are 5.50% and 5.75%, respectively. An investor is weighing the alternatives of purchasing a 120-day GIC versus purchasing a 60-day GIC and then reinvesting its maturity value in a second 60-day GIC. What would the interest rate on 60-day GICs have to b 60 days from now for the investor to end up in the same financial position with either alternative?
Since they are short term instruments, they pay simple interest.
$1000 invested in a 120 day GIC collects insterest of the amount
$1000 invested in a 60 day GIC collects interest
Therefore the amount needed for the next 60 days
= $18.90411 - $9.041096
Effective interest rate
It will require 6% interest for the GIC for the next 60 days to catch up with the equivalent of the 120-day GIC.