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.
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...