What periodic payment does Imran receive from a $100 000, 3-year, monthly payment GIC earning a nominal rate of 2.25% payable monthly?
A) $180.50
B) $187.50
C) $191.75
D) $185.50
E) $208.33

Question

Quizplus · Accepted Answer

First, we need to calculate the effective annual interest rate (EAR) of the GIC:

EAR = (1 + (nominal rate / number of compounding periods))^number of compounding periods - 1
    = (1 + (0.0225 / 12))^12 - 1
    = 0.022847 or 2.2847%

Next, we can use the formula for the present value of an annuity to calculate the periodic payment Imran receives:

P = R * (1 - (1 + r)^(-n)) / r

where P is the present value (which is the initial investment of $100,000), R is the periodic payment we want to find, r is the monthly interest rate (EAR / 12), and n is the number of periods (3 years * 12 months per year = 36 months).

Plugging in the values, we get:

$100,000 = R * (1 - (1 + 0.022847 / 12)^(-36)) / (0.022847 / 12)
R = $187.50

Therefore, Choice B is the correct answer.

What Periodic Payment Does Imran Receive from a $100 000