Question

Jack has $1,000 that he wishes to invest for the next two years. One-year CDs are currently paying 8% while two-year CDs are paying 12% per annum. Economists are predicting that interest rates will rise by the end of the year. What is the minimum amount interest rates would have to increase to in order for the one-year CD to be better than the two-year CD?

Answer 1

A) 16%

Step-by-step explanation:

If we want to compare the return of a 1 year CD versus the return of a 2 year CD:

• a 2 year CD will yield 2 x 12% = 24% at the end of year 2
• a 1 yer CD will yield 8% at the end of year 1

the difference between the return of a 2 year CD and a 1 year CD = 24% - 8% = 16%