Revision as of 22:50, 17 November 2023 by Admin (Created page with "Bank P offers a 3-year certificate of deposit that pays an annual effective interest rate of 4%. In addition, a bonus of 2% of the initial investment is paid at the end of the 3-year period. Bank Q offers a 3-year certificate of deposit without any bonus. Calculate the annual effective interest rate that Bank Q would have to offer to produce the same annual yield as the certificate from Bank P. <ul class="mw-excansopts"><li>4.3%</li><li>4.4%</li><li>4.5%</li><li>4.6%</...")
ABy Admin
Nov 17'23
Exercise
Bank P offers a 3-year certificate of deposit that pays an annual effective interest rate of 4%. In addition, a bonus of 2% of the initial investment is paid at the end of the 3-year period. Bank Q offers a 3-year certificate of deposit without any bonus.
Calculate the annual effective interest rate that Bank Q would have to offer to produce the same annual yield as the certificate from Bank P.
- 4.3%
- 4.4%
- 4.5%
- 4.6%
- 4.7%
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
ABy Admin
Nov 17'23
Solution: D
The value of 1 invested with bank P after three years is 1.043 + 0.02 = 1.144864. The yield from Bank Q satisfies
[[math]]
1.144864=\left(1+i\right)^{3}\Longrightarrow i=1.144864^{1/3}-1=0.04613=4.6\%
[[/math]]
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.