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A 60-day, $1 million CD has an 8% annual rate quote. If CD rates fall to...

A 60-day, $1 million CD has an 8% annual rate quote. If CD rates fall to 7% after 10 days, what would your profit be if you then sold the CD?

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Answer #1

Notional Principle = $1,000,000

Annual Quote = 8%

60 days rates = 8% × 60 / 360

= 1.33%

60 days rates is 1.33%.

Purchase price of CD = $1,000,000 / (1 + 1.33%)

= $986,842.11.

Purchase price of CD is $986,842.11.

After 10 days, 50 days remains in maturity and market interest rate become 7%.

50 days interest rate = 7% × 50 / 360

= 0.97%.

50 days rate after 10 day is 0.97%.

Price of CD after 10 days = $1,000,000 / (1 + 0.97%)

= $990,371.39.

Price of CD after 10 days will be $990,371.39.

Profit = $990,371.39 - $986,842.11

= $3,529.28.

Profit from Investment CD is $3,529.28.

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