Accelerated GIC

[Cheap]

Does anyone know the mathematical formula used to calculate the total amount earned on an accelerated GIC?

Thanks SC'ers.

[ashedfc]

Here is the formula to calculate an Acclerated GIC.

Effective Yield = ((1 + i1) x (1 + i2) x … x (1 + in))^(1/n) x 100%

where

i# = the interest rate for year #

n = total number of years

In our example, we would have:

i1 = .02
i2 = .025
i3 = .026
i4 = .03
i5 = .08
n = 5

Effective Yield = ((1+.02) x (1+.025) x (1+.026) x (1+.03) x (1+.08))^(1/5) x 100%

Effective Yield = 3.5968%

In this case, the effective yield is 3.5968%.

Just to prove it to ourselves that this is in fact the effective yield, let’s show how this particular GIC would grow. Let’s assume we invest $1,000 at the beginning of year 1. We will let the interest compound yearly and the interest earned is reinvested.

End of Using Actual Rate Using Effective Yield Rate

Year 1 $1,020.00 $1,035.97

Year 2 $1,045.50 $1,073.23

Year 3 $1,072.68 $1,111,83

Year 4 $1,104.86 $1,151.82

Year 5 $1,193.25 $1,193.25

So, as you can see, at the end of year 5, you would have the same amount of money. All the effective yield rate does is give you the rate that would be used each year if the rate was fixed. In this example, you would be better off taking this increasing rate GIC over the fixed rate 5-year GIC at 3.125%.

[Cheap]

Thanks Ashedfc. That's exactly the formula that I was looking for.