“Rollover”
To
review what was mentioned in class: A rollover investment refers to an
investment for an initial period, the proceed from which are then re-invested
for a similar period at an interest rate not known at the outset.
For
example, you might have a 2-year investment period and you invest for two years
at 4%. That means you have at the outset
fixed a rate of 4% for each year.
Alternatively, you invest for one year at 3.5%. You do not know the rate you will receive for
the second year until the first year is over.
At that point, you reinvest the proceeds from the first year – you roll
it over – at whatever rate the market presents to you for the second year.
QUESTIONS:
You lend $100,000.
Assume interest is compounded annually. What are the proceeds if:
a)You lend for 2 years at 5%
b) You lend for 1 year at 5%, receive your
proceeds, and then “roll over” the proceeds at 5% for the next year
c) You lend for 1 year at
5%, receive your proceeds, and then “roll over” the proceeds at 6% for the next
year
