Jack has $1000 that he wishes to invest for the next two years. One-year GICs are currently paying eight percent while two-year GICs are paying 12 percent. Economists are predicting that interest rates will rise by the end of the year. What is the minimum interest rate Jack would need in year two, to make the one-year GIC better than the two-year GIC?

Question

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If Jack invests in a one-year GIC, he will earn $80 in interest in the first year. If he then invests the $1080 in a one-year GIC in the second year, he will earn $86.40 in interest. This gives him a total of $166.40 in interest over the two years.If Jack invests in a two-year GIC, he will earn $120 in interest in the first year and $144 in interest in the second year. This gives him a total of $264 in interest over the two years.Therefore, for the one-year GIC to be better than the two-year GIC, the interest rate in the second year would need to be at least 17%.

Jack Has $1000 That He Wishes to Invest for the Next