Beruflich Dokumente
Kultur Dokumente
2.1 Introduction
In section 2.2 and 2.3, both simple and compound interest will
be discussed. Next, we will define the effective interest rate and
present value. To allows customers greater flexibility in the way in
which they repay loans, financial institutions use a procedure called
continuous compounding to calculate interest payments.
__________________________________________________________________
Universiti Malaysia Perlis 2013
2.2 Simple Interest
Simple Interest
I = Pr t
Where
I = simple interest
P = principal
r = rate of simple interest
t = time in years
__________________________________________________________________2
Universiti Malaysia Perlis 2013
Amount Simple Interest/Simple Amount/ Future Value
A = P + Pr t
= P ( 1 + rt )
Where
A = amount or future value
P = principal or present value
r = rate of simple interest
t = time in years
Example 2.2.1
RM1000 is invested for two years in a bank, earning a simple
interest rate of 8% per annum. Find the simple interest earned
Solution
P = RM 1000
r = 0.08
t=2
I = Pr t
= 1000 0.08 2
= RM 160
Exercise 1
RM5000 is invested for 6 years in a bank, earning a simple interest
rate of 5.7 % per annum. Find the simple interest earned
Answer
I=RM 1710
Example 2.2.2
RM10000 is invested for 4 years 9 month in a bank earning a
simple interest rate of 10% per annum. Find the simple amount at
the end of the investment period.
Solution
__________________________________________________________________3
Universiti Malaysia Perlis 2013
P = RM 10000
r = 0.1
t = 4 years9month = 4.75 years
A = P ( 1 + rt )
= 10000 ( 1 + 0.1( 4.75 ) )
= RM 14750
Exercise 2
If Bank A offers a simple interest rate of 8 % per annum, Ahmad
invested RM 9000 for 4 years 6 months in a bank earning. Find the
future value obtain by Ahmad at the end of the investment period.
Anwer
A = RM 12240
Example 3.2.3
Find the present value at 8% simple interest of a debt amount
RM3000 due in ten months.
Solution
A = RM 3000
r = 0.08
10
t = years
12
P = ??
P = A ( 1 + rt )
-1
-1
10
= 3000
1 + 0.08
12
= RM 2812.50
__________________________________________________________________4
Universiti Malaysia Perlis 2013
Example 3
Find the present value at 6% simple interest with total amount of
debt RM 40000 due in 15 years.
Anwer
P = RM 21052.63
A = P(1+ i)
n
Where i = r m and n = mt
A = amount or future value at the end of n periods
P = principal or present value
r = annual nominal rate
m = number of compounding periods per year
i = rate per compounding period
n = total number of compounding periods
t= time in year
__________________________________________________________________5
Universiti Malaysia Perlis 2013
Suppose RM9000 is invested for 7 years at 12% compounded
quarterly
Principal, P
The original principal, denoted by P is the original amount
invested. Here the principal is P = RM 9000
Interest period
Interest period is the length of time in which interest is
calculated. Thus, the interest period is three month.
__________________________________________________________________6
Universiti Malaysia Perlis 2013
Example 2.3.1
Find the accumulated amount after 3 years if RM1000 is invested at
8% per year compounded
a) Annually
b) Semi-annually
c) Quarterly
d) Monthly
e) Daily
Solution
( a ) Annually
r
P = 1000,r = 0.08,m = 1,n = 3 thus i = = 0.08
m
A = P (1+ i)
n
= 1000 ( 1 + 0.08 )
3
= 1259.71
( b ) semi - annually
r 0.08
P = 1000 ,r = 0.08,m = 2 ,n = mt = 2 ( 3 ) =6 thus i = = = 0.04
m 2
A = P ( 1+ i)
n
= 1000 ( 1 + 0.04 )
6
= 1265.32
( c ) quarterly
r 0.08
P = 1000 ,r = 0.08,m = 4 ,n = mt = 4 ( 3 ) =12 thus i = = = 0.02
m 4
A = P ( 1+ i)
n
= 1000 ( 1 + 0.02 )
12
= 1268.24
( d ) monthly
A = 1270.24
( e ) daily
A = 1271.22
__________________________________________________________________7
Universiti Malaysia Perlis 2013
Example 2.3.2
RM9000 is invested for 7 years 3 months. This investment is
offered 12% compounded monthly for the first 4 years and 12%
compounded quarterly for the rest of the period. Calculate the future
value of this investment.
Solution
amount of investment at the end of 4 years
P = 9000
A = 14510.03
amount of investment at the end of 7 years 3 month(3years3months)
r 0.12
P = 14510.03,r = 0.12 ,m = 4 ,n = mt = 3.25 ( 4 ) =13 thus i = =
m 4
A = P ( 1+ i)
n
13
0.12
= 14510.03
1+
4
= 21308.48
Example 3.3.3
What is the annual nominal rate compounded monthly that will
make RM1000 become RM2000 in five years?
Solution
r r
P = 1000 , A = 2000 ,r = ??,m = 12,n = mt = 5 ( 12 ) =60 thus i = =
m 12
mt
r
A = P ( 1+ i ) A = P
n
1+
m
r = 13.94%
Example 4
Answer
r=9.27%
__________________________________________________________________8
Universiti Malaysia Perlis 2013
2.3.1 Effective Rate of Interest
__________________________________________________________________9
Universiti Malaysia Perlis 2013
Example 2.3.4
Find the effective rate of interest corresponding to a nominal rate of
8% per year compounded
a) Annually
b) Semi-annually
c) Quarterly
d) Monthly
e) Daily
Solution
( a ) Annually
r = 0.08,m = 1
m
r
reff = 1+ -1
m
= ( 1 + 0.08 ) - 1
= 0.08
the effective rate is 8 % per year
( b ) semi - annually
r = 0.08,m = 2
m
r
reff =
1+ -1
m
2
0.08
= 1+ - 1
2
= 0.0816
the effective rate is 8.16% per year
( c ) quarterly
The effective rate is 8.243% per year
( d ) monthly
The effective rate is 8.3% per year
( e ) daily
The effective rate is 8.328% per year
10
__________________________________________________________________
Universiti Malaysia Perlis 2013
Example 2.3.5 (Application Effective rate of Interest)
Kamal wishes to borrow some money to finance some business
expansion. He has received two different quotes:
Bank A: charges 15.2% compounded annually
Bank B: charges 14.5% compounded monthly
Which bank provides a better deal?
Solution
r = 15.2%,m = 1
effective rate of bank A is
m
r
reff =
1+ -1
m
1
15.2%
= 1+ - 1
1
= 15.2%
effective rate is 15.2% per year
r = 14.5%,m = 12
effective rate of bank B is
m
r
reff =
1 + -1
m
effective rate is 15.5% per year
11
__________________________________________________________________
Universiti Malaysia Perlis 2013
2.3.2 Present Value
Recall:
A = P(1+ i)
n
Where i = r m and n = mt
P = A( 1 + i )
-n
Where i = r m and n = mt
A = amount or future value at the end of n periods
P = principal or present value
r = annual nominal rate
m = number of compounding periods per year
i = rate per compounding period
n = total number of compounding periods
Example 3.3.6
How much money should be deposited in a bank paying interest at
the rate of 6% per year compounded monthly so that, at the end of 3
years, the accumulated amount will be RM20000?
Solution
12
__________________________________________________________________
Universiti Malaysia Perlis 2013
r 0.06
P = ??, A = 20000 ,r = 0.06 ,m = 12 ,n = mt = 3 ( 12 ) =36 thus i = =
m 12
P = A( 1+ i)
-n
-36
0.06
= 20000
1+
12
= 16713
RM 16713 should be invested so that we get accumulated RM 20000
after 3 years
Exercise 5
Find the present value of RM 56 500 due in 7 years at an interest of
8% per year compounded semi-annually.
Answer
P= RM 32, 627.34
Example 2.3.7
Find the present value of RM49, 158.60 due in 5 years at an interest
of 10% per year compounded quarterly.
Solution
r 0.1
P = ??, A = 49158.60,r = 0.1,m = 4,n = mt = 5 ( 4 ) =20 thus i = =
m 4
P = A(1+ i)
-n
-20
0.1
= 49158.60
1+
4
= 30000.07
Solution
( a ) P = 1999.03
( b ) P = 2288.69
13
__________________________________________________________________
Universiti Malaysia Perlis 2013
( c ) A = 3434.70
A = Peit
A = amount or future value at the end of n periods
P = principal or present value
e = 2.718282
i = rate per compounding period
t = time in years
Example 2.3.9
Find the accumulated value of RM1000 for six months at 10%
compounded continuously.
Solution
6
P = 1000, A = ??,i = 0.10,t = = 0.5 year
12
A = Peit
= 1000e0.1( 0.5)
= 1051.27
Exercise 6
Find the accumulated value of RM8000 in 1 year 4 months at 8%
compounded continuously.
Answer
A=8900.51
14
__________________________________________________________________
Universiti Malaysia Perlis 2013
Example 2.3.10 (HOMEWORK2)
Find the amount to be deposited now so as to accumulate RM1000
in eighteen months at 10% compounded continuously.
Solution
A = Peit
P = 860.71
2.4 Annuities
S = R
i
Where i = r m and n = mt
Example 2.4.1
15
__________________________________________________________________
Universiti Malaysia Perlis 2013
Find the amount of an ordinary annuity consisting of 12 monthly
payments of RM100 that earn interest at 12% per year compounded
monthly.
Solution
r 0.12
R = 100,S = ??,i = = = 0.01,n = mt = 12 ( 1) = 12
m 12
( 1 + i ) - 1
n
S = R
i
( 1 + 0.01) - 1
12
= 100
0.01
= 1268.25
sum of all the future values
Solution
r 0.12 31
R = 100,S = ??,i = = = 0.01,n = mt = 12 = 31
m 12 12
( 1 + i ) - 1
n
S = R
i
( 1 + 0.01) - 1
31
= 100
0.01
= 3613.27
Anwser
S=2697.35
16
__________________________________________________________________
Universiti Malaysia Perlis 2013
Example 2.4.4 (D)
Lily invested RM100 every month for five years in an investment
scheme. She was offered 5% compounded monthly for the first three
years and 9% compounded monthly for the rest of the period.
Determine the future value of this annuity at the end of five years
and total amount money after 5 years.
Solution
amount just after the 3rd year
S = 3875.33
amount at the end of 5 years
24
0.09
A = 3875.33 1+
12
= 4636.50
amount at the end of 5years
r 0.09
R = 100,S = ??,i = = ,n = mt = 12 ( 2 ) = 24
m 12
( 1 + i ) - 1
n
S = R
i
0.09
24
1+ - 1
12
= 100
0.09
12
= 2618.85
hence, the amount in the account at the end of 5 years is
RM4636.50 + RM2618.85 = RM 7255.35
17
__________________________________________________________________
Universiti Malaysia Perlis 2013
2.4.2 Present Value of Ordinary Annuity Certain
Example 2.4.5
After making a down payment of RM4000 for an automobile,
Maidin paid RM400 per month for 36 month with interest charged
at 12% per year compounded monthly on the unpaid balance. What
was the original cost of the car?
Solution
18
__________________________________________________________________
Universiti Malaysia Perlis 2013
0.12
R = 400 ,i = ,n = mt = 12 ( 3) = 36
12
1- ( 1+ i)
-n
P = R
i
1 - ( 1 + 0.01)
-36
= 400
0.01
= 12043
Example 2.4.6
As a savings program toward Alfian college education, his parents
decide to deposit RM100 at the end of every month into a bank
account paying interest at the rate of 6% per year compounded
monthly. If the saving program began when Alfian was 6 years old,
how much money would have accumulated by the time he turn 18?
Answer
P= RM 10247.47
Answer
( a ) P = 6373.02
( b ) total interest = RM 826.98
19
__________________________________________________________________
Universiti Malaysia Perlis 2013
2.4.3 Amortization
Amortization
Pi
R=
1- (1+ i)
-n
Where
P = present value of annuity at the end of n periods
R = periodic payments
i = interest rate per interest period
n = term of investment
Example 2.4.8
A sum of RM50000 is to be repaid over a 5 year period through
equal instalments made at the end of each year. If an interest rate of
8% per year is charged on the unpaid balance and interest
calculations are made at the end of each year, determine the size of
each instalment so that the loan is amortized at the end of 5 years.
Solution
20
__________________________________________________________________
Universiti Malaysia Perlis 2013
0.08
P = 50000 ,i = ,n = mt = 1( 5 ) = 5
1
Pi
R=
1- ( 1+ i)
-5
50000 ( 0.08 )
=
1 - ( 1 + 0.08 )
-5
= 12522.82
Have to pay RM 12522.82 per year within 5 years
Example 2.4.9
Andy borrowed RM120, 000 from a bank to help finance the
purchase of a house. The bank charges interest at a rate 9% per year
in the unpaid balance, with interest computations made at the end
of each month. Andy has agreed to repay the loan in equal monthly
instalments over 30 years. How much should each payment be if
the loan is to be amortized at the end of the term?
Solution
0.09
P = 120000,i = = 0.0075,n = mt = 12 ( 30 ) = 360
12
R = 965.55
Have to pay RM 965.55 per month within 30 years
21
__________________________________________________________________
Universiti Malaysia Perlis 2013
2.4.4 Sinking Fund
Sinking Fund
iS
R=
(1+ i) -1
n
Where
S = future value of annuity at the end of n periods
R = periodic payments
i = interest rate per interest period
n = term of investment
Example 2.4.10 D
Solution
( a ) annual interest payment = RM 1000 0.10 = RM 100
( b ) S = 1000,i = 0.08,n = 5
iS
R=
( 1+ i ) -1
n
0.08 ( 1000 )
=
( 1 + 0.08 ) - 1
5
= 170.46
( c ) annual cost = annual interest payment + annual deposit
= RM 100 + RM 170.46
= RM 270.46
Pay RM 270.46 annually for 5 years
Example 2.4.11
Solution
R = 3434.02 per month for 2 years
Example 2.4.12
Harris, a self employed individual who is 46 years old, is setting up a
defined benefit retirement plan. If he wishes to have RM250000 in
this retirement account by age 65, what is the size of each yearly
23
__________________________________________________________________
Universiti Malaysia Perlis 2013
instalment he will be required to make into a saving account earning
1
interest at 8 % yr?
4
m=1
Solution
R = 5313.59
2.5 Depreciation
Original cost
The original cost of an asset is the amount of money paid for an asset
plus any sales taxes, delivery charges, installation charges and other
cost.
Salvage value
The salvage value (scrap value or trade in value) is the value of an
asset at the end of its useful life. If a company purchases a new
machine and sells it for RM600 at the end of its useful life, then the
salvage value is RM600. The salvage value of an asset is an estimate
that is usually based on previous salvage value of a similar asset.
Useful life
The useful life an asset is the life expectancy of the asset or the
number of years the asset is expected to last. For example, if a
company expects to use machinery for 10 years, then its useful life is
10 years.
24
__________________________________________________________________
Universiti Malaysia Perlis 2013
Total depreciation
The total depreciation or the wearing value of an asset is the
difference between cost and scrap value.
Annual depreciation
The annual depreciation is the amount of depreciation in a year. It
may or may not be equal from year to year.
Accumulated depreciation
The accumulated depreciation is the total depreciation to date. If the
depreciation for the first year is RM2000 and for the second year
RM1000 then the accumulated depreciation at the end of the second
year is RM3000
Book value
The book value or carrying value of an asset is the value of the asset
as shown in the accounting record. It is the difference between the
original cost and the accumulated depreciation charged to that date.
For example a car which was purchased for RM40000 two years ago,
will have a book value of RM34000 if its accumulated depreciation
for two years is RM6000.
The book values of an asset after the third year and fifth year using the
straight line method are RM7000 and RM5000 respectively. What is
the annual depreciation of the asset?
Solution
Decline in value from third year to fifth year = RM7000-RM5000
=RM2000
this decline occurs within two years. hence
RM 2000
annual depreciation =
2
= RM 1000
Example 2.5.2
John Company bought a lorry for RM38000. The lorry is expected to
last 5 years and its salvage value at the end of 5 years is RM8000.
Using the straight line method to;
a) Calculate the annual depreciation
b) Calculate the annual rate of depreciation
c) Calculate the book value of the lorry at the end of third year
d) Prepare a depreciation schedule
Solution
26
__________________________________________________________________
Universiti Malaysia Perlis 2013
( a ) Cost = RM 38000
Salvage value = RM 8000
Total Depreciation = RM 38000 - RM 8000 = RM 30000
Useful life = 5 years
cost - salvage value
annual depreciation =
useful life
RM 38000 - RM 8000
=
5
= RM 6000
annual depreciation
( b ) annual rate of depreciation = 100%
total depreciation
6000
= 100%
30000
= 20%
( c ) book value = cost - accumulated depreciation
= RM 38000 - 3 RM 6000
= RM 20000
(d)
End of Annual Accumulated Book value at end
Year Depreciation(RM) Depreciation (RM) Of year(RM)
0 0 0 38000
1 6000 6000 32000
2 6000 12000 26000
3 6000 18000 20000
4 6000 24000 14000
5 6000 30000 8000
27
__________________________________________________________________
Universiti Malaysia Perlis 2013
2.5.2 Declining Balance Method
28
__________________________________________________________________
Universiti Malaysia Perlis 2013
Example 2.5.3
Example 2.5.4
Given
Cost of the asset = RM15000
Useful life = 4 years
Scrap value = RM3000
a) Find the annual rate of depreciation
b) Construct the depreciation schedule
Using the declining balance method
Solution
( a ) C = RM 15000
S = RM 3000
n = 4 years
S
r = 1- n
C
3000
= 1- 4
15000
= 33.13%
( ) Depreciation
b
for the first year = 33.13% RM15000 =RM 4969.50
Year Annual Accumulated Book Value (RM)
Depreciation(RM) Depreciation (RM)
0 0 0 15000
1 4969.50 4969.50 10030.50
2 3323.10 8292.60 6707.40
3 2222.16 10514.76 4485.24
4 1485.24 12000 3000
29
__________________________________________________________________
Universiti Malaysia Perlis 2013
2.5.3 Sum of Years Digits Method
n
The depreciation in the first year is X the depreciable value of
s
the asset,
30
__________________________________________________________________
Universiti Malaysia Perlis 2013
n -1
Depreciation in the the second is X the depreciable value of
s
the asset,
n-2
Depreciation in the the third is X the depreciable value of the
s
asset and so on
Example 2.5.5
A machine is purchased for RM45000. Its life expectancy is 5 years
with a zero trade in value. Prepare a depreciation schedule using the
sum of the years digits method.
Solution
useful life,n = 5
sum of years digits, S = 1 + 2 + 3 + 4 + 5 = 15
or
n ( n + 1) 5 ( 6 )
S= = = 15
2 2
Amount of depreciation for each year is calculated as follows
Example 2.5.6
A computer is purchased for RM3600. It is estimated that its salvage
value at the end of 8 years will be RM600. Find the depreciation and
the book value of the computer for third year using the sum of the
years digits method.
Answer
S = 36
C = RM 3600
S = RM 600
Depreciable value =RM3000
Depreciation for the third year =RM500
Accumulated depreciation for the first 3years =RM1750
Book Value = RM 1850
Solution
32
__________________________________________________________________
Universiti Malaysia Perlis 2013
n ( n + 1) 8 ( 9 )
S= = = 36
2 2
C = RM 3600
S = RM 600
Depreciable value = Original Cost - Salvage Value
=RM3600 - RM600
=RM3000
6
Depreciation for the third year = 3000
36
=RM500
8 7 6
Accumulated depreciation for the first 3years = + + RM 3000
36 36 36
=RM1750
Book Value = RM3600 - RM1750
= RM 1850
33
__________________________________________________________________
Universiti Malaysia Perlis 2013