# Calculating Equivalent GIC (simple interest)

• Feb 1st 2011, 10:35 AM
Calculating Equivalent GIC (simple interest)
Rob has $1,000 to invest for 120 days and is considering two options. Option 1: He can invest the money in a 120-day GIC paying simple interest of 4.48%. Option 2: He can invest the money in a 60-day GIC paying simple interest of 4.50% and then re-invest the maturity value into another 60-day GIC. What would the interest rate on the second 60-day GIC have to be for both options to be equivalent? So far I have got: Option 1: 1000(1+.0448)(120/365)=1014.73 Option 2: 1000(1+.045)(60/365)=1007.39 1007.39(1+.45)(60/365)=1014.84 I know i should use the formula R=I/PT im just not sure what numbers to plug in to find the equivalent rate.. Can anyone show me how to solve this? The answer is not in the back of the book. • Feb 1st 2011, 11:27 AM dwsmith Quote: Originally Posted by Adam123 Rob has$1,000 to invest for 120 days and is considering two options.

Option 1: He can invest the money in a 120-day GIC paying simple interest of 4.48%.

Option 2: He can invest the money in a 60-day GIC paying simple interest of 4.50% and then re-invest the maturity value into another 60-day GIC.

What would the interest rate on the second 60-day GIC have to be for both options to be equivalent?

So far I have got:

Option 1:
1000(1+.0448)(120/365)=1014.73

Option 2:
1000(1+.045)(60/365)=1007.39

1007.39(1+.45)(60/365)=1014.84

I know i should use the formula R=I/PT im just not sure what numbers to plug in to find the equivalent rate.. Can anyone show me how to solve this? The answer is not in the back of the book.

What is GIC? If you are going to use acronyms, at least tell us what they mean.
• Feb 1st 2011, 11:30 AM
Quote:

Originally Posted by dwsmith
What is GIC? If you are going to use acronyms, at least tell us what they mean.

Guaranteed Investment Certificates

sorry
• Feb 1st 2011, 11:34 AM
dwsmith
Quote:

Guaranteed Investment Certificates

sorry

Your formulas are written wrong which was causing me to get odd answers.

$\displaystyle P\left(1+[i\cdot n]\right)\neq P(1+i)n$

$\dispalystyle 1000\cdot (1+.0448)\cdot\frac{120}{365}=343.50$

$\displaystyle 1000\cdot\left(1+\left[.0448\cdot\frac{120}{365}\right]\right)=1014.73$

$\displaystyle 1007.39\cdot\left(1+\left[i\cdot\frac{60}{365}\right]\right)=1014.73$
• Feb 1st 2011, 11:41 AM
Wilmer
Quote:

So far I have got:
Option 1:
1000(1+.0448)(120/365)=1014.73
Option 2:
1000(1+.045)(60/365)=1007.39
1007.39(1+.45)(60/365)=1014.84

Change last line: 1007.39(1 + r)(60/365) = 1014.73
Solve for r
• Feb 1st 2011, 12:00 PM
R(interest rate) is what im trying to figure out im not sure what numbers to put in to find the interest rate.
• Feb 1st 2011, 12:06 PM
dwsmith
Quote:

R(interest rate) is what im trying to figure out im not sure what numbers to put in to find the interest rate.

I edited my post. Your formulas weren't correct.
• Feb 1st 2011, 12:13 PM
How do I solve for I? to get the interest rate
• Feb 1st 2011, 12:20 PM
dwsmith
Quote:

How do I solve for I? to get the interest rate

$\displaystyle \frac{1}{1007.39}\left[1007.39\cdot\left(1+\left[i\cdot\frac{60}{365}\right]\right)\left]=1014.73\cdot\frac{1}{1007.39}$

$\displaystyle 1+\left[i\cdot\frac{60}{365}\right]-1=\frac{1014.73}{1007.39}-1$

$\displaystyle \left[i\cdot\frac{60}{365}\right]=\frac{1014.73}{1007.39}-1\Rightarrow\cdots$
• Feb 1st 2011, 12:30 PM
I'm not sure how to use that to calculate what the interest rate should be for the second one
• Feb 1st 2011, 12:31 PM
dwsmith
Quote:

I'm not sure how to use that to calculate what the interest rate should be for the second one

i is the interest rate for the second one.

$\displaystyle 1007.39\cdot\left(1+\left[i\cdot\frac{60}{365}\right]\right)=1014.73$

Solve for i and you have the answer.
• Feb 1st 2011, 12:46 PM
How do I solve for i?

the formula I learned was R(rate)=I/Pt

so R(rate)=7.34/1007.39(60/365)
R= .0443 4.43%?

awesome it worked.. thankyou so much!!

i went and plugged that into your formula

1007.39 (1+ [.0443(60/365]) =1014.726 rounded to 1014.73
• Feb 1st 2011, 12:50 PM
dwsmith
Quote:

How do I solve for i?

Post 9
• Nov 25th 2012, 03:56 PM
abegail
Re: Calculating Equivalent GIC (simple interest)
I was stuck on a similiar question, i think i got it after countless hours! lol so heres my solution.
Your first calculation of 4.5% on a 60 day = $1007.39 (MINUS THAT) from the Found MATURITY VALUE of THE 120 day of$1014.73
which will give you a difference of $7.34. Which means for your 2nd 60 day calculation you want the RATE (in percentage) difference from$1007.39 to $1014.73 So the then you plug into the formula you had ... R=I/PT OVERALL interest in dollar amount : was ... R =$7.34 (interest) DIVIDED BY : $1007.39(1st principal amount first 60 day) x 60 (2nd 60day) / divided by 365 days will give you R =$7.34 / 165.60
which equals RATE OF CHANGE = 0.044324111 X 100 %

EQUALS = 4.432 % WOULD BE THE INTEREST RATE ON THE 2ND 60 DAY GIC TO BE EQUIVALENT...

Hope that is correct and therefore hope it may help... feel free to correct and feedback... :O) I tried...