The current rates on 90- and 180-day GICs are 5.5% and 6% simple interest, respectively. An investor is trying to decide whether to purchase a 90-day GIC and then reinvest its maturity value in a second 90-day GIC. What would the interest rate on 90-day GICs have to be 90 days from now for the investor to end up in the same financial position with either alternative?
A) 5.595%
B) 6.500%
C) 6.249%
D) 6.413%
E) 7.000%

Question

Quizplus · Accepted Answer

To be in the same financial position, the investor needs to earn the same total interest over 180 days. The effective rate for 180 days at 6% is 3% for each 90-day period. The future 90-day rate should be such that the compounded interest over two 90-day periods equals the 6% simple interest for 180 days. Solving for this gives approximately 6.413%.

The Current Rates on 90- and 180-Day GICs Are 5