Arithmetic Ability
Compound Interest

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Q.

A chartered bank offers a five-year Escalator Guaranteed Investment Certificate.In successive years it pays annual interest rates of 4%, 4.5%, 5%, 5.5%, and 6%, respectively, compounded at the end of each year. The bank also offers regular five-year GICs paying a fixed rate of 5% compounded annually. Calculate and compare the maturity values of $1000 invested in each type of GIC. (Note that 5% is the average of the five successive one-year rates paid on the Escalator GIC.)

View Answer

Correct choice: A

Explanation:

FV = $1000(1.04)(1.045)(1.05)(1.055)(1.06) = $1276.14 the maturity value of the regular GIC is FV = $ 1000 x (1.05)5 = $1276.28
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