Currently interest rates continue to be close to historic lows, resulting in low

Question

Currently interest rates continue to be close to historic lows, resulting in low borrowing costs for consumers. Savers, on the other hand, continue to struggle in this low interest rate environment. Currently a 6 month certificate of deposit pays about .20%, while a 5 year certificate of deposit pays 1.5%. At first glance this may not appear to be a significant difference in rates; however comparisons may illustrate otherwise. If we assume annual compounding, at each of these rates, how long would it take an investment to double its value.

Explanation / Answer

Ans. Here, we will use the CMPD function of financial calcualtor FC-200V to solve the question.

Case1. 6 month certificate of deposit pays 0.20%

Set Mode as Begin, N= ?, I =0.40%, PV= -100 (assumed), FV= 200 (assumed), P/Y=1, C/Y=1

Solve for N.

N = 346.9200485

Time required for 6 month certificate of deposit to double its value is 346.92 yrs

Case 2. 5 year certificate of deposit pays 1.5%

Set Mode as Begin, N= ?, I =1.5%, PV= -100 (assumed), FV= 200 (assumed), P/Y=1, C/Y=1

Solve for N.

N = 46.55552563

No. of years = 46.55552563

Time required for 5 year certificate of deposit to double its value is 46.56 yrs.

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