BU521 BUSINESS MATHEMATICS

TUTORIAL SOLUTIONS
TOPIC SIX – ANNUITIES

Question 1:
A family started a savings account for their recently born daughter, Mary. If the
family made a deposit of $25 a quarter for 18 years, earning 10% p.a. interest
compounded quarterly, how much will Mary have at age 18?
Solution:
R=25
I=0.025
N=72
(1 + 𝑖)𝑛−1
S =unknown S=R
𝑖
(1 + 0.025)72−1
=25 0.025
=25 (196.6891225)

=4,917.23

Mary will have or accumulate $4,917.23 by the time she is 18 years old.

Question 2:
Betty deposits $350 at the end of each quarter in an account receiving 10% p.a.
interest compounded quarterly. If she deposits this amount quarterly for 6 years, how
much will be in the account 5 years after the last deposit is made? (Assume the 10%
p.a. interest rate applies and remains constant over the duration of the investment).
Solution:
Thus, after 6 years, the future value of $350 deposited quarterly at 10% p.a.
interest compounded quarterly is $11,322.16, comprised of deposits of $8,400 ($350 x
24 periods) and accrued interest of $2,922.16 ($11,322.16 - $8,400).
The $11,322.16 is to remain in the account for another 5 years after the last deposit
attracting interest of 10% p.a. compounded quarterly, hence; the compound interest
formula must be applied:
P = $11,322.16
𝑖 = 0.10/4 𝑛 = 5 years
= 0.025 = 20 periods (4 x 5)

S = P (1 + i)n

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Therefore, there will be $18,522.68 in the account 5 years after the last deposit is
made.

Question 3:
A police officer decides to deposit $100 per week in a 13.5% interest-bearing account
(compounded monthly) for the remainder of his working life of 35 years.
(a) How much will he accumulate at the end of the 35 years?
Solution:
S = $3,868,284.44

(b) How much interest of that was accrued?

Solution:
I = $3,700,284

Question 4:
Anna plans to go on a vacation to visit her grandparents whom she never met in 3
years and estimated that she would need at least $5,000 for the trip. She approaches
BSP Bank who offers a savings scheme that attracts 12% p.a. interest compounded
quarterly. How much should Anna deposit in that savings account in order to achieve
her vacation plan?
Solution:
R = $352.31
Thus, Anna must deposit $352.31 every quarter to have $5,000 in 3 years.

Question 5:
Mark must repay a debt of $12,000 (including interest) in 5 years. If deposits in an
account attract 10% p.a. interest compounded semi-annually, how much should Mark
deposit every 6 months to ensure accumulation of $12,000 in 5 years?
Solution:
R = $954.05
Thus, $954.05 must be deposited semi-annually to accumulate $12,000. Mark deposit a
total of $9,540.50 hence, interest would be $2,459.50.

Question 6:
An archeologist wants to conduct a research in the South Pacific region and he
calculated that he would need at least $1,600 a month as living allowance for the 5
years of research work in the islands. How much must he deposit today in an account

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earning 12% p.a. interest compounded monthly in order to withdraw $1,600 a month over
the next 5 years?
Solution:
The archeologist must deposit $71,928.06 today in order to be able to withdraw
$1,600 a month over the next 5 years.

Question 7:
Bank South Pacific advertises a house for $135,000 and repayments of $1,340.50 per
month over 25 years at an interest rate of 13.5% p.a. compounded monthly. What is the
equivalent cash price of the house?
Solution:
Cash equivalent price thus is $250,000.72 ($135,000 + $115,000.72)

Question 8:
John took a $70,000 mortgage loan at 10% p.a. interest compounded quarterly over 25
years.
(a) Calculate John’s quarterly repayments?

Solution:
R = $1,911.83

(b) Calculate the total interest paid over the 25-year loan period.

Solution:
At the end of the 25th year, John has made a total payment of $191,183 ($1,911.83 x
100). This pay-out comprise of interest repayments of $121,183 ($191,183 - $70,000).

Note: Interest Paid = Total repayments - principal

(c) Determine the outstanding balance at the end of 9th year (refer to b above).

Solution:

A = $60,726.78

(d) Determine the amount of interest paid at the end of 9th year (refer to C above)
Solution:
At the end of the 9th year, Peter has made a total payment of $68,825.88 ($1911.83 x
36). This pay-out comprise of interest repayments of $59,552.66 ($68,825.88 -
$9,273.22)

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