Mod - 2 - Comparing interest amounts

[Jin Yoong]

Got this question from one of the candidate for the upcoming Dec 08
exam ....


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From M2 Sept 96

13. On 2 February 1994, a bank which calculates interest on a 12 month
year basis, published the 3-month FD rate at 5.50% p.a., whilst a
Discount house was quoted you a 3-month repo deposit at 5.50% p.a. As
treasurer of a corporation, with a cash surplus of RM10 million and
good for a 3-month period, what is your choice of investment?

A. Place RM10 million for 3-month fixed deposit
B. Place RM5 million for 3-month fixed deposit with a bank and place
repo deposit for RM5 million.
C. Place RM10 million for 3-month repo deposit
D. Place RM7 million for 3-month FD and RM3 million repo deposit
E. None of the above


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Answer:

The bank will calculate interest based on the following:
(3month/12month) x 5.5% x 10mil
= 137,500

The discount house will use number of days
2 Feb to 2 May = 89 days

Interest =
(89/365) x 5.5% x 10mil = 134,109.59

So better put in the bank.