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Credit and borrowing


Syllabus topic FM4 Credit and borrowing
In this chapter you will learn to:
Calculate the principal, interest and repayments for flat-rate loans
Calculate the values using a table of home loan repayments
Calculate future value and present value
Compare different options for borrowing money
Calculate credit card payments, interest charges and balances

1.1 Flat-rate loans


Interest is paid for borrowing money. There are different ways of calculating interest. Flat-rate
loans use simple interest. Simple interest (or flat interest) is a fixed percentage of the amount
borrowed and is calculated on the original amount. For example, if we borrow $10000 from a
bank at a simple interest rate of 6% per annum (per year) we would be required to pay $600
each year. That is,
6
Interest = $10000 0.06 (or
) = $600
100
Flat-rate loans are calculated on the initial amount borrowed or the principal. The amount
owed on the loan is calculated by adding the interest to the principal.
Flat-rate loans
I = Prn A = P + I
I Interest (simple or flat) to be paid for borrowing the money

1.1
1.2
1.5

P Principal is the initial amount of money borrowed


r Rate of simple interest per period, expressed as a decimal
n Number of time periods

A Amount owed or total to be paid


1

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HSC Mathematics General 2

Example 1

Calculating the interest on a flat-rate loan

Abbey applied for a flat-rate loan of $40000 at 9% per annum simple interest. She plans to
repay the loan after two years and six months.
a How much interest will be paid?
b What is the total owing at the end of two years and six months?
Solution
1
2
3
4
5
6
7
8

Write the simple interest formula.


Substitute P = 40000, r = 0.09
and n = 2.5 into the formula.
Evaluate.
Write the answer in words.
Write the amount owed formula.
Substitute P = 40000 and
I = 9000 into the formula.
Evaluate.
Write the answer in words.

Example 2

I = Prn
= 40000 0.09 2.5
= $9000

Simple interest owed is $9000.


b A = P + I

= 40000 + 9000

= $49000
Amount owed is $49000.

Finding the principal for a flat-rate loan

Noah applied for a flat-rate car loan


with an interest rate of 9% p.a. He was
told the total simple interest would be
1
$6300 for 3 years. What was the principal?
2

Solution
1
2
3
4
5

Write the simple interest formula.


Substitute I = 6300, r = 0.09 and
n = 3.5 into the formula.
Make P the subject of the formula by
dividing both sides by (0.09 3.5).
Evaluate.
Write the answer in words.

I = Prn
6300 = P 0.09 3.5

6300
(0.09 3.5)
= $20000

P=

Principal is $20000.

ISBN: 9781107654594
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Photocopying is restricted under law and this material must not be transferred to another party

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Chapter 1 Credit and borrowing

Example 3

Using a graphics calculator for a flat-rate loan

Mary and Lucas plan to borrow $300000 at


1
8 % p.a. simple interest for 3 years. Answer
2
the following questions by using a graphics calculator.
a How much simple interest will they pay over the
3 years?
b What is the total amount owed after 3 years?

Solution
1
2

3
4
5

6
7
8

Select the TVM (Time, Value, Money) menu.


Select Simple Interest (F1).

Enter the time period n = 3 365 = 1095


(simple interest period is calculated in days).
Enter the interest rate I% = 8.5.
Enter the principal or present value
PV = 300000. In the TVM mode, all money
we pay out is negative and money we receive is
positive. In this example $300000 is received.
To calculate the simple interest, select SI.
Write the answer in words.
To calculate the total amount owed, select
SFV (Simple Final Value).

They will pay $76500.


b

Write the answer in words.

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Total owed $376500.

Cambridge University Press

HSC Mathematics General 2

Loan repayments
A loan repayment is the amount of money to be paid at regular intervals over the time period.
The interval is often fortnightly or monthly.
Loan repayments
Loan repayment = Total to be paid Number of repayments

Example 4

Calculating a loan repayment

Jessica wishes to buy a lounge suite priced


at $2750. She chooses to buy it on terms
by paying a 10% deposit and borrowing the
balance. Interest is charged at 11.5% p.a.
on the amount borrowed. Jessica makes
fortnightly repayments over 3 years. Calculate
her fortnightly repayments.

Solution
1
2

3
4
5
6
7

9
10

Calculate the deposit by multiplying


10% or 0.10 by $2750.
Calculate the balance by subtracting
the deposit ($275) from the cost
price ($2750).
Write the simple interest formula.
Substitute P = 2475, r = 0.115 and
n = 3 into the formula.
Evaluate.
Write the loan repayment formula.
Calculate the total to be paid by
adding the balance ($2475) and the
interest ($853.875).
Calculate the number of repayments
by multiplying the fortnights in a
year (26) by the number of years (3).
Evaluate correct to two decimal
places.
Write the answer in words.

Deposit = 10% of $2750


= 0.10 2750
= $275
Balance = 2750 275
= $2475
I = Prn
= 2475 0.115 3
= $853.875
Total to be paid
Number of repaymen
nts
Principal + Interest
=
Number of repayments
=
(2475 + 853.875)
=
(3 26)
= 42.67788462
= $42.68

Repayment =

Fortnightly repayments are $42.68.

ISBN: 9781107654594
The Powers Family Trust 2013
Photocopying is restricted under law and this material must not be transferred to another party

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Chapter 1 Credit and borrowing

Exercise 1A
1

Calculate the amount of simple interest for each of the following loans:
a Principal = $25000, Interest rate = 11% p.a., Time period = 4 years.
1
b Principal = $400000, Interest rate = 8 % p.a., Time period = 5 years.
4
c Principal = $560000, Interest rate = 6.75% p.a., Time period = 15 years.
d Principal = $7400, Interest rate = 7% p.a., Time period = 18 months.
e Principal = $80000, Interest rate = 9.25% p.a., Time period = 30 months.

Calculate the amount owed for each of the following loans:


a Principal = $800, Simple interest rate = 6% p.a., Time period = 3 years.
1
b Principal = $5200, Simple interest rate = 16% p.a., Time period = 7 years.
2
c Principal = $12500, Simple interest rate = 11.4% p.a., Time period = 4.5 years.
1
d Principal = $6000, Simple interest rate = 4 % p.a., Time period = 6 months.
2
e Principal = $40000, Simple interest rate = 7.75% p.a., Time period = 42 months.

A sum of $170000 was borrowed for 3 years.


a Find the simple interest owed if the rate of interest is 6.5% per annum.
b What is the amount owed at the end of 3 years?

Hayley intends to borrow $2700 to


build a driveway for her new house.
She is offered a flat-rate loan with a
simple interest rate of 14.5% per
annum. How much interest will be
owed after 3 months? Answer correct
to the nearest cent.

Ethan borrowed $1800 at 6% per


annum. What is the simple interest
owed between 30 June and
1 September?

1
Ruby borrows $36000 for 3 years. What is the rate of simple interest if she will owe
2
$8820 in interest?
Chloe has paid $49500 interest on a $220000 loan at a flat interest rate of 10%. What
was the term of the loan?

ISBN: 9781107654594
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Photocopying is restricted under law and this material must not be transferred to another party

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HSC Mathematics General 2

Create the spreadsheet below.

1A

a
b
c
d
e
f

Cell D5 has a formula that calculates the simple interest. Enter this formula.
Fill down the contents of D6 to D8 using the formula for D5.
Cell E5 has a formula that calculates the amount owed. Enter this formula.
Fill down the contents of E6 to E8 using the formula for E5.
Change the interest rate from 8% to 10%.
Change the time period from 20 years to 15 years.

Bailey buys a television for $1800. He pays it off monthly over 2 years at a flat interest
rate of 12.5% per annum.
a How many months will it take Bailey to pay for the television?
b What is the interest charged for the 2 years?
c How much per month will he pay? Give your answer to the nearest cent.

10

Mitchell approached a bank for a


business loan of $22000. The interest
rate is 10.5% p.a. flat. He decides to
repay the loan over a period of
4 years.
a What is the principal?
b What is the rate of interest?
c What will be the amount of
interest charged over that period?
d What will be the monthly
repayment? Give the answer
correct to the nearest cent.

11

Jordan decides to buy a car for $23000. He has saved $9000 for the deposit and takes out
a flat-rate loan over 2 years for the balance. The interest charged is 13% per annum.
a What is the balance?
b What is the total amount of interest to be paid?
c What will be his monthly repayment? Answer correct to the nearest cent.

ISBN: 9781107654594
The Powers Family Trust 2013
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Chapter 1 Credit and borrowing

Development
12

Mia borrowed $400000 at a flat rate of interest of 8.5% per annum. This rate was fixed
for 2 years on the principal. She pays back the interest only over this period.
a How much interest is to be paid over the 2 years?
b After paying the fixed rate of interest for the first year, Mia finds the bank will
decrease the flat interest rate to 7.5% if she pays a charge of $2000. How much will
she save by changing to the lower interest rate for the last year?

13

Cooper plans to borrow money to


purchase a car and considers the
following fortnightly repayment
guide. He decides to borrow $19000
and pay back the loan in fortnightly
instalments over 2 years. What is the
flat rate of interest per annum on this
loan, correct to two decimal places?

Fortnightly repayments

Amount
borrowed

1 year

2 years

3 years

$18000

$755

$427

$305

$18500

$783

$429

$307

$19000

$804

$431

$309

14

A truck is advertised at $36000. It can be bought on terms for a 20% deposit and
repayments of $276 per week for 3 years. Assume there are 52 weeks in the year.
a What is the deposit?
b Calculate the total cost of the truck if bought on these terms.
c What is the total interest paid?
d What is the flat interest rate for the loan, correct to one decimal place?

15

Determine the flat rate of interest


charged on a painting that has a cash price
of $7500. The painting was purchased on
terms with a 20% deposit and the balance
to be paid at $370 per month for 2 years.

16

Grace takes a loan of $30000 over


60 months for a swimming pool. The
repayment rate is $677.50 per month.
a How much will Grace pay back
altogether?
b What is the flat interest rate per annum for the loan, correct to one decimal place?
c Grace would like to increase the loan to $40000 to landscape the pool. What would
be her monthly repayment assuming the same time period and flat interest rate?
Answer correct to the nearest cent.

ISBN: 9781107654594
The Powers Family Trust 2013
Photocopying is restricted under law and this material must not be transferred to another party

Cambridge University Press

HSC Mathematics General 2

1.2 Table of loan repayments


A home loan or mortgage is a loan given to buy a house or a unit. The interest on a home
loan is often calculated per month on the amount of money owing and repayments are made
monthly. The amount owing after each month becomes the new principal for the next month.
Each calculation results in a smaller amount of interest and is called reducible interest.
These calculations are often displayed in a table.
Table of loan repayments
Amount owed and the interest paid reduce after each loan repayment.
1.5
Example 5

Calculating the values in a table of loan repayments

Riley has taken out a home loan of $400000. The flat rate of interest is 9% p.a. and the
monthly repayment (R) is $3120. Complete the table below for one month to answer these
questions.
a What interest is owed after one month?
b Determine the value of P + I.
c Determine the value of P + I R.
Months (n)

Principal (P)

Interest (I)

P+I

P+I+R

$400000.00

Solution
1
2

3
4
5
6

Write the simple interest formula.


Substitute P = 400000, r = 0.09
1
into the formula and
and n =
12
evaluate.
Write the answer in the table.
Add the principal ($400000) and
the interest ($3000).
Write the answer in the table.
Subtract the monthly repayment
($3120) from the amount owing
(P + I or $403000).
Write the answer in the table.

I = Prn

= 400000 0.09

1
12

= $3000
Interest owed is $3000.
b

P + I = 400000 + 3000
= $403000

P + I R = 400000 + 3000 3120


= $399880

Months (n)

Principal (P)

Interest (I)

P+I

P+IR

$400000.00

$3000

$403000

$399880

ISBN: 9781107654594
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Chapter 1 Credit and borrowing

Example 6

Calculating the values in a table of loan repayments

What are the missing values in the table of home loan repayments shown below?
Amount borrowed

$150000

Annual interest rate (r)

7%

Monthly repayment (R)

$1200

Month (n)
1

Principal (P)

This table assumes the same


number of days in each
month.
r
I = Prn or I = P
12

Interest (I)

P+I

P+IR

$150000.00

2
Solution
1
2

3
4
5

Write the simple interest formula.


Substitute P = 150000, r = 0.07 and
1
into the formula.
n=
12
Evaluate.
Add the principal ($150000) and the
interest ($875).
Subtract the monthly repayment
($1200) from the amount owing
(P + I or $150875).
The answer for P + I R is the
principal for the next month
($149675). It is the amount owing
after one month. Write it in the table
for the second month.
Repeat the above steps for the second
row to determine the amount owing
after 2 months.
Notice the amount of interest in the
second month ($873.10) is less than
the amount of interest in the first
month ($875).

First month
I = Prn
= 150 000 0.07

= $875

1
12

P + I = 150000 + 875
= $150875
P + I - R = 150875 - 1200
= $149675
New principal is $149675.
Second month
I = Prn
1
= 149675 0.07
12
= $873.10
P + I = 149675 + 873.10
= $150548.10
P + I R = 150548.10 1200
= $149348.10

Month (n)

Principal (P)

Interest (I)

P+I

P+IR

$150000.00

$875.00

$150875.00

$149675.00

$149675.00

$873.10

$150548.10

$149348.10

ISBN: 9781107654594
The Powers Family Trust 2013
Photocopying is restricted under law and this material must not be transferred to another party

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10

HSC Mathematics General 2

Exercise 1B
1

Kayla borrows $170000 for a home at an interest rate of 6% p.a. with a monthly
repayment of $1000.
Months (n) Principal (P) Interest (I)

P+I

P+IR

$170000.00

Answer correct to the nearest cent. Use this approximation in subsequent questions.
a Determine the interest, I, charged for the first month.
b Determine the value of P + I for the first month.
c Determine the value of P + I R for the first month.
d Determine the interest, I, charged for the second month.
e Determine the value of P + I for the second month.
f
Determine the value of P + I R for the second month.
g Determine the interest, I, charged for the third month.
h Determine the value of P + I for the third month.
i
Determine the value of P + I R for the third month.
2

Chris borrowed $250000 at 7.2% p.a. for a unit. The interest is charged monthly and the
monthly repayment is $1650. Complete the following table.
Months (n)

Principal (P)

Interest (I)

P+I

P+IR

$250000.00

$1500.00

$251500.00

$249850.00

$249850.00

$1499.10

$251349.10

$249699.10

3
4
5
Answer correct to the nearest cent. Use this approximation in subsequent questions.
a What is the principal at the beginning of the third month?
b Calculate the interest charged for the third month.
c How much is owed at the end of the third month?
d What is the principal at the beginning of the fourth month?
e Calculate the interest charged for the fourth month.
f
How much is owed at the end of the fourth month?
g What is the principal at the beginning of the fifth month?
h Calculate the interest charged for the fifth month.
i
How much is owed at the end of the fifth month?
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Chapter 1 Credit and borrowing

11

Development
3

Complete the table of home loan repayments shown below. Use your calculator answer to
complete each cell of the table, not an approximation. Answer correct to the nearest cent.
Amount borrowed

$300000

Annual interest rate (r)

7%

Monthly repayment (R)

$2000

Month (n) Principal (P)

This table assumes the same


number of days in each month.
r
I = Prn or I = P
12

Interest (I)

P+I

P+IR

$300000.00

$1750.00

$301750.00

$299750.00

$299750.00

$1748.54

$301498.54

$299498.54

3
4
5
6
7
8
4

Complete the table of home loan repayments shown below. Use your calculator answer to
complete each cell of the table, not an approximation. Answer correct to the nearest cent.
Amount borrowed
Annual interest rate (r)
Fortnightly repayment (R)

$520000
8%
$1800

This table assumes there


are 26 fortnights in a year.
r
I = Prn or I = P
26

Fortnight (n)

Principal (P)

Interest (I)

P+I

P+IR

$520000.00

$1600.00

$521600.00

$519800.00

$519800.00

$1599.38

$521399.38

$519599.38

3
4
5
6
7
8

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12

HSC Mathematics General 2

Create the spreadsheet below.

1B

a
b
c
d
e

Cell B9 has a formula that refers to cell B4 or the amount. Enter this formula.
Cell C9 has a formula that calculates the simple interest. Enter this formula.
Cell D9 has a formula that calculates the amount owing. Enter this formula.
Cell E9 has a formula that calculates the amount owing after a repayment has been
made. Enter this formula.
Fill down the contents of B9:E9 to B13:E13.

Dylan borrowed $240000 for an investment property. The interest rate is 10% p.a. and he
makes monthly repayments of $2300. Construct a table of home loan repayments for the
first two months to answer the following questions.
a How much interest was paid in the first month?
b What is the balance owing after one month?
c How much has the principal been reduced during the first month?
d How much interest was paid in the first two months?
e What is the balance owing after two months?
f
How much has the principal been reduced during the first two months?

Charlotte borrowed $480000 for an inner city apartment. The interest rate is 8% p.a. and
she makes fortnightly repayments of $1600. Construct a table of home loan repayments
for the first three fortnights.
a What is the balance owing after the first fortnight?
b How much interest was paid in the first fortnight?
c How much has the principal been reduced during the first fortnight?
d What is the balance owing after three fortnights?
e How much interest was paid in three fortnights?
f
How much has the principal been reduced during the three fortnights?

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Chapter 1 Credit and borrowing

13

1.3 Future value formula


Compound interest is calculated on the initial amount borrowed or invested plus any interest
that has been charged or earned. It calculates interest on the interest. In the preliminary
course we used the formula A = P(1 + r)n to calculate the compound interest. In the financial
world, the compound interest formula is known as the future value formula and is expressed
as FV = PV(1 + r)n. The amount (A) is the future value (FV) and the principal (P) is the
present value (PV).
Future value formula
FV = PV(1 + r)n or

PV =

FV
or
(1 + r )n

I = FV - PV

FV Future value of the loan or amount (final balance)


PV Present value of the loan or principal (initial quantity of money)
r Rate of interest per compounding time period expressed as a decimal
n Number of compounding time periods
I Interest (compounded) earned

Example 7
a
b

Calculating future value and present value

Blake invests $7000 over 5 years at a compound interest rate of 4.5% p.a. Calculate the
future value after 5 years. Answer correct to the nearest cent.
Calculate the present value of an annuity that has a future value of $500000 over 8 years
with an interest rate of 8.5% per annum compounded monthly.
Solution
1
2
3
4
5
6

7
8
9

Write the future value formula.


Substitute PV = 7000, r = 0.045 and n = 5
into the formula.
Evaluate to the nearest cent.
Write the answer in words.
Write the future value formula.
The investment is compounding per month
hence the rate (r) and time period (n) are
expressed in months.
Substitute FV = 500000, r = 0.085 and
12
n = 8 12 = 96.
Evaluate to the nearest cent.
Write the answer in words.

FV = PV(1 + r)n
= 7000(1 + 0.045)5
= $8723.27
a

Future value is $8723.27.


b

FV
(1 + r )n
500000
=
0.085 96
(1 +
)
12
= $253916.41

PV =

Present value is $253916.41.

ISBN: 9781107654594
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14

HSC Mathematics General 2

Exercise 1C
1

Calculate the future value, to the nearest cent, for each of the following:
a Present value = $400, Compound interest rate = 3% p.a., Time period = 2 years.
1
b Present value = $3000, Compound interest rate = 5 % p.a., Time period = 5 years.
2
1
c Present value = $18000, Compound interest rate = 10% p.a., Time period = 2
2
years.
1
d Present value = $65000, Compound interest rate = 5.9% p.a., Time period = 3
4
years.

Use the formula FV = PV(1 + r)n to calculate the value of an investment of $16000, over
a period of 2 years with an interest rate of 5% compounding annually.

Sophia and Isaac invested $27000 for 6 years at 9% p.a. interest compounding annually.
What is the amount of interest earned in the first year?

Calculate the present value, to the nearest cent, for each of the following:
a Future value = $34000, Interest rate = 4% p.a., Time period = 4 years.
1
b Future value = $200000, Interest rate = 12 % p.a., Time period = 5 years.
4
1
c Future value = $4600, Interest rate = 15% p.a., Time period = 2 years.
2
1
d Future value = $60000, Interest rate = 6.25% p.a., Time period = 1 years.
4
5 Calculate the present value of an investment that has a future value of $5000 after 4 years
and earns 9% p.a. compound interest, paid annually.

ISBN: 9781107654594
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Chapter 1 Credit and borrowing

15

Development
6

Calculate the future value, to the nearest cent, for each of the following:
a Present value of $680 invested for 4 years at 5% p.a. compounded biannually.
b Present value of $5000 invested for 6 years at 6% p.a. compounded quarterly.
c Present value of $1400 invested for 3 years at 4.2% p.a. compounded monthly.
d Present value of $780 invested for 5 years at 9.8% p.a. compounded weekly.
e Present value of $290 invested for 7 years at 10% p.a. compounded fortnightly.

Calculate the present value, to the nearest dollar, for each of the following:
a Future value of $1243, interest rate at 6% p.a. compounded biannually for 5 years.
b Future value of $8200, interest rate at 4% p.a. compounded quarterly for 8 years.
c Future value of $1580, interest rate at 4.8% p.a. compounded monthly for 4 years.
d Future value of $19600, interest rate at 8% p.a. compounded weekly for 3 years.
e Future value of $3800, interest rate at 5% p.a. compounded fortnightly for 7 years.

Find the future value of a bank account after 3 years if the present value of $4000 earns
4.6% p.a. interest compounding quarterly.

Alexander invested $16400 over 6 years at 7.4% p.a. interest compounding monthly.
a Calculate the value of the investment after 4 years.
b Calculate the compound interest earned.

10

What sum of money would Max need to invest to accumulate a total of $100000 at the
end of 7 years at 8% p.a. interest compounding biannually? Answer to the nearest cent.

11

What sum of money needs to be invested to accumulate a total of $40000 after 10 years
at 9.25% p.a. interest compounding monthly? Answer to the nearest cent.

12

How much more interest is earned on $60000 if interest of 8% p.a. is compounded


quarterly over 6 years than if simple interest of 8% is earned over the same time?

13

Mikayla invests $200000 for 10 years at 6% p.a. interest compounded quarterly. Abby
also invests $200000 for 10 years, but her interest rate is 6% p.a. compounded monthly.
a Calculate the value of Mikaylas investment at maturity.
b Show that the compounded value of Abbys investment is greater than the value of
Mikaylas investment.
c Explain why Abbys investment is worth more than Mikaylas investment.

ISBN: 9781107654594
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16

HSC Mathematics General 2

1.4 Comparing loans


Comparing loans and making the best choice is not simply about choosing a loan with the
lowest interest rate. Borrowers also need to consider the following factors:
Flexibility ability to redraw money and make extra repayments. This allows the loan to
meet changing needs without incurring extra costs, for example, if you get a higher paying
job and want to increase the amount of your repayments.
Comparison rate interest rate on the loan that includes the interest and any fees or
charges. It takes into account the amount of the loan, the term of the loan and the number
of repayments. Comparison rates calculators are available on the internet to compare
loans. The calculator shown below (from www.nmb.com.au) compares different loan
amounts, standard and introductory interest rates, terms and fees.
Input Loan Details

Loan 1

Loan Amount :

$150.000

$150.000

Terms (years) :

25

25

Introductory Term
(months) :

Introductory Interest
Rate :

0.00

0.00

Standard Interest Rate :

6.00

6.00

Establishment Fees :

$0

$0

Monthly Fees :

$10

$0

Annual Fees :

$0

$0

Discharge Fees :

$0

$0
Calculate

Scroll down to view results.

Comparison Rate Results


Total Term of Loan
(months) :
Introductory Payment
(monthly) :

Loan 2

Loan 1

Clear Inputs
Loan 2

300

300

$0.00

$0.00

- no. of introductory
payments :

Standard Payment
(monthly) :

$966.45

$966.45

- no. of standard
payments :

300

300

Comparison Rate :

6.11%

6.00%

The above table shows the comparison of two loans that are identical except for a $10 monthly
fee. The comparison rates are 6% and 6.11%.
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Chapter 1 Credit and borrowing

17

Effective interest rate


The effective interest rate is another method of
comparing interest rates with different time periods.
It is an equivalent interest rate if compounding
happened annually. The effective interest rate is a
single rate that takes into account different rates and
time periods.

Effective interest rate


E = (1+ r)n - 1
1.3
1.4

E Effective rate of interest per annum as a decimal


r Rate of interest per compounding period expressed as a decimal
n Number of compounding time periods per annum
Example 8

Calculating the effective interest rate

Calculate the effective annual interest rate of a home loan with an interest rate of 7.25% p.a.
compounded monthly. Give your answer as a percentage correct to two decimal places.
Solution
1
2
3
4
5

Write the effective interest formula.


Substitute r = (0.0725 12) and n = 12 into
the formula.
Evaluate.
Express the answer as a percentage correct
to two decimal places.
Write the answer in words.

E = (1 + r )n 1
12

0.0725
= 1 +
1

12
= 0.07495829742
= 7.50%
Effective interest rate is 7.50%.

Consider a bank loan with an annual interest rate of 12% p.a. The table below shows the
effective annual interest rate if the compounding period is annual, biannual, quarterly or
monthly. When the interest is compounding monthly, quarterly or biannually, the amount of
interest paid is more than if the interest is compounding annually.
Compounding period

Interest rate

Time periods

Effective interest rate

Annual

12%

12.00%

Biannual

6%

12.36%

Quarterly

3%

12.55%

Monthly

1%

12

12.68%

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18

HSC Mathematics General 2

Exercise 1D
1

The table below compares loans offered by the same bank.

a
b
c
d
e
f
2

Which loan type has the lowest interest rate?


Which loan type has the highest application fee?
What is the service fee for the basic loan?
What is the interest rate for a variable loan?
What is the legal fee for the intro loan?
What is the difference in the interest rates between the variable and basic loans?

The table below compares the features offered by different loans.

a
b
c
d
e
f
g
h

Which loan has the lower comparison rate?


Which loan has the greater wealth package saving?
What is the interest rate for the fixed loan?
What is the interest rate for the standard variable loan?
What is the monthly loan service fee for the fixed loan?
What is the upfront establishment fee for both loans?
What is the difference between the interest rate and the comparison rate for the
standard variable loan?
What is the difference between the interest rate and the comparison rate for
the fixed loan?

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Chapter 1 Credit and borrowing

19

Development
3

Use the formula E = (1 + r)n - 1 to calculate the effective annual interest rate. Give your
answer as a percentage correct to two decimal places.
a Interest rate of 6% p.a. compounding biannually.
b Interest rate of 7% p.a. compounding biannually.
c Interest rate of 8% p.a. compounding quarterly.
d Interest rate of 6.4% p.a. compounding quarterly.
e Interest rate of 10% p.a. compounding monthly.
f
Interest rate of 14% p.a. compounding monthly.
g Interest rate of 7.6% p.a. compounding half-yearly.
h Interest rate of 12.36% p.a. compounding half-yearly.

Use the formula E = (1 + r)n - 1 to calculate the effective annual interest rate. Give your
answer as a percentage correct to two decimal places.
a Interest rate of 7.2% p.a. compounding fortnightly.
1
b Interest rate of 7 % p.a. compounding fortnightly.
2
c Interest rate of 4.8% p.a. compounding weekly.
d Interest rate of 9.6% p.a. compounding weekly.
1
e Interest rate of 14 % p.a. compounding daily.
2
f
Interest rate of 10.8% p.a. compounding daily.

A finance company advertises home loans


with an interest rate of 9% p.a. compounded
monthly. What is the effective interest rate
over a 12-month period? Answer correct to
two decimal places.

Lily and Jacob would like to borrow $200000


for a home to be repaid in equal monthly
instalments of $1800 over 30 years.
a How much is paid on the loan for one
year?
b Determine the total amount to be repaid
on the loan.
c Calculate the total interest payment.
d What is the equivalent annual flat rate of interest? (Answer correct to one decimal
place.)
e What is the effective interest rate if the annual interest is compounded monthly?
Answer correct to one decimal place.

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20

HSC Mathematics General 2

1.5 Credit cards


Credit cards are used to buy goods and
services and pay for them later. The time
when interest is not charged on your purchases
is called the interest-free period. If payment
is not received when the statement is due then
interest is charged from the date of purchase.
Interest on credit cards is usually calculated
daily on the outstanding balance using
compound interest.
Credit cards
Daily interest rate =

Annual interest rate


365

A = P(1 + r)n I = A - P
A Amount owing on the credit card
P Principal is the purchases made on the credit card plus the outstanding balance
r Rate of interest per compounding time period expressed as a decimal
n Number of compounding time periods
I Interest (compound) charged for the use of their credit card

Example 9

Calculating the cost of using a credit card

Samantha has a credit card with a compound


interest rate of 18% p.a. and no interest-free period.
Samantha used her credit card to pay for clothing
costing $280. She paid the credit card account 14 days
later. What is the total amount she paid for the clothing,
including the interest charged?
Solution
1
2
3
4
5

Write the formula for compound interest.


Substitute P = 280, r = (0.18 365) and
n = 14 into the formula.
Evaluate.
Express the answer correct to two decimal
places.
Answer the question in words.

A = P(1 + r )n
14

0.18
= 280 1 +
365

= 281.9393596
= $281.94
Clothing costs $281.94

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Chapter 1 Credit and borrowing

21

Credit card statements


Credit card statements are issued each month and contain information such as account
number, opening balance, new charges, payments, refunds, reward points, payment due data,
minimum payment and closing balance.
Example 10

Reading a credit card statement

CapitalBank
Mr John Citizen
123 Sample Street
Suburbia NSW 2000
Mastercard 0000 1801 0002 1010
Opening balance

$207.72

New charges

$460.14

Payments/refunds

Capital Awards 0000123456


Opening points balance
Total points earned
Points redeemed

$207.72

50,500
460
15,600

Payment due date


30 November
Minimum payment
$25.00
Closing balance
$460.14

Total points balance


34,910

Answer the following questions using the above credit card statement.
a What is the credit card account number?
b What is the opening balance?
c What is the payment due date?
d What is the minimum payment?
e What is the closing balance?
Solution
1
2
3
4
5

Read number after MasterCard.


Read Opening balance.
Read the box Payment due date.
Read the box Minimum payment.
Read the box Closing balance.

a
b
c
d
e

0000180100021010
Opening balance is $207.72.
Payment due date is 30 November.
Minimum payment is $25.00.
Closing balance is $460.14.

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22

HSC Mathematics General 2

Exercise 1E
1

Use the credit card statement opposite to


answer these questions.
a What is the due date?
b What is the cost of the purchases?
c What is the closing account balance?
d What is the minimum amount due?
e What payment was made last month?
f
How much interest was charged?
g What was the opening balance?
h What is the cardholders credit
balance?
A credit card has a daily interest rate of
0.05% per day. Find the interest charged
on these outstanding balances. Answer
correct to the nearest cent.
a $840 for 12 days
b $742.40 for 20 days
c $5680 for 30 days
d $128 for 18 days
e $240 for 6 days
f
$1450 for 15 days

Account Summary
Opening Balance

$743.42

Payments and Other Credits

$743.42

Purchases

$172.91
$0.00

Cash Advances

$0.00

Interest and Other Charges


Closing Account Balance

$172.91

Cardholder Credit Balances

4,511.88

Payment Summary
$4,684.79

Card Balances Renewal

$10.00

Monthly Payment
Due Date

21/04/2012

Minimum Amount Due

$10.00

Calculate the amount owed, to the nearest cent, for each of the following credit card
transactions. The credit card has no interest-free period.
a Transactions = $540, Compound interest rate = 14% p.a., Time period = 15 days.
b Transactions = $270, Compound interest rate = 11% p.a., Time period = 9 days.
c Transactions = $1400, Compound interest rate = 18% p.a., Time period = 22 days.
d Transactions = $480, Compound interest rate = 16% p.a., Time period = 18 days.
e Transactions = $680, Compound interest rate = 10% p.a., Time period = 9 days.

Calculate the interest charged for each of the following credit card transactions. The
credit card has no interest-free period. Answer correct to the nearest cent.
a Transactions = $680, Compound interest rate = 15% p.a., Time period = 20 days.
b Transactions = $740, Compound interest rate = 12% p.a., Time period = 13 days.
c Transactions = $1960, Compound interest rate = 17% p.a., Time period = 30 days.
d Transactions = $820, Compound interest rate = 21% p.a., Time period = 35 days.
e Transactions = $1700, Compound interest rate =19% p.a., Time period = 32 days.

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Chapter 1 Credit and borrowing

23

Luke has a credit card with a compound interest rate of 19.99% per annum.
a What is the daily percentage interest rate, correct to two decimal places?
b Luke has an outstanding balance of $4890 for a period of 30 days. How much
interest, to the nearest cent, will he be charged?

Andrews credit card charges 0.054% compound interest per day on any outstanding
balances. How much interest is Andrew charged on an amount of $450, which is
outstanding on his credit card for 35 days? Answer correct to the nearest cent.

Joel has a credit card with an interest rate of 0.04% compounding


per day and no interest-free period. He uses his credit card to pay
for a mobile phone costing $980. Calculate the total amount paid
for the mobile phone if Joel paid the credit card account in the
following time period. Answer correct to the nearest cent.
a 10 days later
b 20 days later
c 30 days later
d 40 days later
e 50 days later
f
60 days later

Olivia received a new credit card with no interest-free period and a daily compound
interest rate of 0.05%. She used her credit card to purchase food for $320 and petrol for
$50 on 18 July. This amount stayed on the credit card for 24 days. What is the total
interest charged? Answer correct to the nearest cent.

Alyssa uses a credit card with a no interest-free period and a compound interest rate of
15.5% p.a. from the purchase date. During April she makes the following transactions.
Transaction details

a
b
c
d

04 April

IGA Supermarket

$85.00

09 April

KMart

$115.00

12 April

David Jones

$340.00

27 April

General Pants

$80.00

28 April

JB-HIFI

$30.00

What is the daily compound interest rate, correct to three decimal places?
Alyssas account is due on 30 April. What is the total amount due?
How much interest has Alyssa paid on the IGA transaction during the month?
Answer correct to the nearest cent.
How much interest has Alyssa paid on the KMart transaction during the month?
Answer correct to the nearest cent.

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24

HSC Mathematics General 2

Development

1.5

10

Charlies credit card has up to 55 days interest free and is due on the 22nd of each month.
The interest rate is 19.4% p.a. compounding daily. Charlie buys furniture costing $5160
on 25 October. How much interest is he charged if he pays the balance on 22 December?
Interest is charged from the date of purchase if the total amount owing has not been paid
by the due date.

11

Harry buys two Blu-ray DVDs for $29.90 each and a


shirt for $84.95 on his credit card. This amount stays
on his credit card for 75 days. There is a 45-day
interest-free period and a daily interest of 0.05%
compound on his credit card.
a How much did Harry spend on his credit card?
b Calculate the amount Harry owes on the credit
card.
c What was the interest charged on these
purchases?
d What would be the interest charged if Harrys
credit card did not have a 45-day interest-free
period?

12

Sarah and Joshua each use their credit cards to buy holiday packages to Adelaide. The
cost of the package is $1700 for each person.
a The charge on Sarahs credit card is 0.9% compound interest per month on the
unpaid balance. It has no interest-free period. Sarah pays $800 after one month and
another $500 the next month. How much does she still owe on her credit card?
b The charge on Joshuas credit card is interest-free in the first month, and 1.4%
compound interest per month on any unpaid balance. Joshua pays $800 after one
month and another $500 the next month. How much does he still owe on his
credit card?

13

Emilys August credit card statement shows an opening balance of $1850, a purchase of
$2450 on 5 August, and another purchase of $55 on 14 August. The minimum payment is
3% of the closing balance. The initial credit charge is 1.6% compounding per month of
any amount outstanding.
a What is the closing balance on this credit card for August?
b Calculate the amount of interest charged for the month of August.
c What is the minimum payment, to the nearest cent, required for August?
d What is the opening balance for October if Emily paid the minimum payment in
September for interest charged in August and made no purchases in September?

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Chapter 1 Credit and borrowing

Study guide 1

Flat-rate loans

I = Prn A = P + I
I Interest (simple or flat) earned for the use of money
P Principal is the initial amount of money borrowed
r Rate of simple interest per period expressed as a decimal
n Number of time periods
A Amount of final balance

Table of loan repayments

The interest on a home loan is often calculated per month on the


amount of money owing, and repayments are made per month.
The amount owing after each month becomes the new principal
for the next month. Each calculation results in a smaller amount
of interest and is called reducible interest. These calculations are
often displayed in a table.

Future value formula

Comparing loans

Credit cards

FV
or I = FV PV
(1 + r )n
FV Future value of the loan or amount (final balance)
PV Present value of the loan or principal (initial quantity of
money)
rR
 ate of interest per compounding time period as a decimal
n Number of compounding time periods
I Interest (compounded) earned

FV = PV(1 + r)n or

PV =

Comparing loans and making the best choice is not simply about
choosing a loan with the lowest interest rate. Borrowers need to
consider flexibility, fees and the comparison rate.

Annual interest rate


365
A = P(1 + r)n I = A - P
A Amount owing on the credit card
P Principal is the purchases plus the outstanding balance
r Rate of interest per compounding time period as a decimal
n Number of compounding time periods
I Interest charged for the use of their credit card
Daily interest rate =

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Review

Chapter summary Credit and borrowing

25

Review

26

HSC Mathematics General 2

Sample HSC Objective-response questions


1

What is the interest earned on $1400 at 7% p.a. simple interest for 3 years?
A $98
B $294
C $498
D $1694

David wants to earn $9000 a year in interest. How much must he invest if the simple
interest rate is 15% p.a.? Answer to the nearest dollar.
A $1350
B $10350
C $60000
D $600000
Use the table below to answer questions 3 and 4. The table uses an interest rate of 11% p.a.
with a monthly repayment of $1250.

Months (n)

Principal (P)

Interest (I)

$120000

$1100

P+I

What is the value of P + I?


A $118900
B $120011

$121100

$121250

What is the value of P + I R?


A $119850
B $119900

$120000

$122200

P+IR

Holly invests $8000 at 10% p.a. interest compounding annually. What is the future value
after 3 years? Answer to the nearest dollar.
A $242
B $2648
C $8242
D $10648

Nathan borrows $3000 at 10% p.a. interest compounding annually. What is the amount
owed after 2 years? Answer to the nearest dollar.
A $3030
B $3060
C $3600
D $3630

What is the future value after 3 years of $6000 invested at 7% p.a. interest compounding
monthly? Answer to the nearest dollar.
A $1350
B $1397
C $7350
D $7398

Calculate the present value of an amount invested for 4 years at an interest rate of 4.5% p.a.
compounded quarterly, if it has a future value of $20000?
A $16722
B $16771
C $19125
D $23920

A credit card has a daily interest rate of 0.05% per day and
no interest-free period. Find the interest charged on $1530
for 14 days. Answer correct to the nearest cent.
A $0.77
B $10.74
C $76.50
D $1540.71

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Chapter 1 Credit and borrowing

William takes out a flat-rate loan of $60000 for a period of 5 years, at a simple interest rate
of 12% per annum. Find the amount owing at the end of 5 years.

Amelia would like to purchase a


$2000 television from electronics shop.
However, to buy the television she has
applied for a flat-rate loan over 2 years
at 15% p.a. How much does Amelia pay
altogether for the TV?

Paige takes out a loan of $21000 over


36 months. The repayment rate is
$753.42 per month.
a How much will Paige pay back
altogether?
b What is the equivalent flat interest rate per annum for the loan, correct to one decimal
place?

James borrows $280000 and repays the loan in equal fortnightly repayments of $1250 over
20 years. What is the flat rate of interest per annum on Jamess loan, correct to two decimal
places?

Complete the table of home loan repayments shown below. Use your calculator answer to
complete each cell of the table, not an approximation. Answer correct to the nearest cent.
Amount borrowed

$450000

Annual interest rate (r)

6.25%

Monthly repayment (R)

$2450

Month (n)

Principal (P)

Interest (I)

$450000.00

$2343.75

This table assumes the same


number of days in each month.
r
I = Prn or I = P
12
P+I

P+IR

2
3
4

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Review

Sample HSC Short-answer questions

27

Review

28

HSC Mathematics General 2

Julia has been given a home loan of $400000 at 8% p.a. compounded monthly. The loan is
to be repaid in 300 equal monthly instalments of $3087.26.
a Determine the amount to be repaid on this loan.
b How much interest is paid on this loan?
c Using the formula E = (1 + r)n - 1, find the effective interest rate of the loan per annum.
Give your answer as a percentage correct to two decimal places.

Calculate the future value, to the nearest cent, for each of the following:
a Present value = $920, invested for 4 years at 5% p.a. compounded monthly.
b Present value of $2100, invested for 3 years at 6.1% p.a. compounded monthly.

Calculate the present value, to the nearest cent, for each of the following:
a Future value = $26000, Interest rate = 4.9% p.a., Time period = 3 years.
b Future value of $10400, Interest rate at 9% p.a. compounded quarterly for 5 years.

What sum of money would Emma need to invest to accumulate a total of $200000 at the
end of 10 years at 12% p.a. interest compounding biannually? Answer to the nearest cent.

10

Madison has a credit card with an interest rate of


17% p.a. compounding daily and no interest-free
period. Madison used her credit card to pay for
shoes costing $170. She paid the credit card account
26 days later. What is the total amount she paid for
the shoes, including the interest charged?

11

Benjamin uses a credit card that has no interest-free period and a compound interest rate of
18.5% p.a. from the purchase date. During February he makes the following transactions.
Transaction details

a
b

06 February

Coles

$278.00

07 February

Myer

$87.00

18 February

Big W

$259.00

18 February

Jag

$120.00

20 February

Bunnings

$460.00

What is the daily compound interest rate, correct to three decimal places?
Benjamins account is due on 28 February. What is the interest charged for the
transaction at Bunnings? Answer correct to the nearest cent.
Challenge questions 1

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