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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

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

r Rate of simple interest per period, expressed as a decimal

n Number of time periods

1

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Example 1

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

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

b A = P + I

= 40000 + 9000

= $49000

Amount owed is $49000.

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

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.

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Example 3

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 Simple Interest (F1).

(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).

b

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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

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

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.

= 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 =

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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.

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 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?

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.

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?

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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

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.

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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

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

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

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.

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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

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

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

= $399880

Months (n)

Principal (P)

Interest (I)

P+I

P+IR

$400000.00

$3000

$403000

$399880

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Example 6

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

Amount borrowed

$150000

7%

$1200

Month (n)

1

Principal (P)

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

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

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10

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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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

7%

$2000

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

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

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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13

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

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

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

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

b

FV

(1 + r )n

500000

=

0.085 96

(1 +

)

12

= $253916.41

PV =

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14

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.

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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

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.

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16

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

6.00

6.00

Establishment Fees :

$0

$0

Monthly Fees :

$10

$0

Annual Fees :

$0

$0

Discharge Fees :

$0

$0

Calculate

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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17

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.

E = (1+ r)n - 1

1.3

1.4

r Rate of interest per compounding period expressed as a decimal

n Number of compounding time periods per annum

Example 8

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

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

Annual

12%

12.00%

Biannual

6%

12.36%

Quarterly

3%

12.55%

Monthly

1%

12

12.68%

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18

Exercise 1D

1

a

b

c

d

e

f

2

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?

a

b

c

d

e

f

g

h

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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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.

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.

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

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 =

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

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

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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21

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

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

Opening points balance

Total points earned

Points redeemed

$207.72

50,500

460

15,600

30 November

Minimum payment

$25.00

Closing balance

$460.14

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 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

Exercise 1E

1

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

$743.42

Purchases

$172.91

$0.00

Cash Advances

$0.00

Closing Account Balance

$172.91

4,511.88

Payment Summary

$4,684.79

$10.00

Monthly Payment

Due Date

21/04/2012

$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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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.

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

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

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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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

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.

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.

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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25

Review

26

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

A $118900

B $120011

$121100

$121250

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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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.

$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?

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

6.25%

$2450

Month (n)

Principal (P)

Interest (I)

$450000.00

$2343.75

number of days in each month.

r

I = Prn or I = P

12

P+I

P+IR

2

3

4

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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

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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