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Compound Interest

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A bank offers a rate of 5.3% compounded semi-annually on its four year GICs(Guaranteed Investment Certificates). What monthly and annually compounded rates should it quote in order to have the same effective interest rate at all three nominal rates?

  • Compound Interest -

    for the rate compounded monthly equivalent to a rate of 5.3% compounded semi-annually :
    let the monthly rate be i
    then
    (1+i)^12 = (1 + .053/2)^2 , take √
    (1+i)^6 = 1.0265 , now take the 6th root

    1+i = 1.004368675
    so i = .004368675
    so the annual rate is 12(.004368675)
    = .052424

    So 5.2424% compounded monthly is equal to 5.3% compounded semi-annually

    for the annual rate,
    let the annual rate be j
    (1+j) = (1 + .053/2)2
    1+j = 1.053702
    j = .053702 ---> an annual rate of 5.3702%

  • Compound Interest -

    if grandpa payed an insurance policy weekly payments of $1.02 at 3 and 1/2 percent interest compounded annually for 49 years(588 months) how much would it payout after his death to granddaughter? Based on Commissions 1961 Standard Industrial Mortality Table.

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