Question

Interest rates were at historical highs in the early 1980s. In August of 1981, you could earn 17.5% compounded annually on a five-year term deposit with a Canadian bank. Since then, the interest rate offered on five-year term deposits dropped to a low of 2.0% compounded annually in February of 2019. On a $14,500 deposit for a term of five years, how much more would you have earned at the historical high interest rate than at the more recent low rate? (Round your intermediate calculations and final answer to 2 decimal places.)

Answer 1

Interest rate on five year term deposit in August 1981 = 17.5% compounded annually Interest rate on five year term deposit in February 2019 = 2% compounded annually Amount after the end of 5 years on a deposit of $14,500 at 17.5% compounded annually = 14,500(1+0.175)^5 = $32,475.61 Interest earned = $32,475.61 - $14,500 = $17,975.61 Amount after the end of 5 years on a deposit of $14,500 at 2% compounded annually = 14,500(1+0.02)^5 = $16,009.17 Interest earned = $16,009.17 - $14,500 = $1,509.172 Extra interest that would have been earned at the historical high interest rate than at the more recent low rate = $17,975.61 - $1,509.172 = $16,466.44 1