Question

Bank 1 is offering loans at 2% APR with monthly compounding. Bank 2 has a CD paying an interest rate of 3% APR with semi-annual compounding. Can you make a riskless profit by borrowing and lending? Suppose you borrowed $10,000 from Bank 1 and invested it in Bank 2. How much money will you have after one year?

Answer 1

Can you make a riskless profit by borrowing and lending?

Yes, we can make riskless profit because borrowing cost is less than earning rate.

Suppose you borrowed $10,000 from Bank 1 and invested it in Bank 2. How much money will you have after one year?

.

Future value = Present value x (1+Rate/Compounding per period) ^ Compounding per period

Profit = FV value of investment at Bank 2 - FV value of borrowing at Bank 1

Profit = $10,000 x (1+3%/2)^2 - $10000 x (1+2%/12)^12

Profit = $100.41