a. Jones invests 100,000 in a 180-day short term guaranteed investment certificate at a bank, based on simple interest at annual rate 7.5%. After 120 days, interest rates have risen to 9% and Jones would like to redeem the certificate early and reinvest in a 60-day certificate at the higher rate.
In order for there to be no advantage in redeeming early and reinvesting at the higher rate, what early redemption penalty (from the accumulated book value of the investment certificate to time 120 days) should the bank charge at the time of early redemption?
b. Jones wishes to invest funds for a one-year period. Jones can invest in a one-year guaranteed investment certificate at a rate of 8%. Jones can also invest in a 6-month GIC at annual rate 7.5%, and then reinvest the proceeds at the end of 6 months for another 6-month period.
Find the minimum annual rate needed for a 6-month deposit at the end of the first 6-month period so that Jones accumulates at least the same amount with two successive 6-month deposits as she would with the one-year deposit.