MATHEMATICS ADVANCED

(INCORPORATING EXTENSION 1/2)

YEAR 12 COURSE

 Topic summary and exercises:

With references to

A X1 X2 Modelling Financial
Situations

Name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial version by H. Lam, September 2014 (Applications of geometric series).
Major revisions July 2020 for Mathematics Advanced. Last updated November 22, 2021.
Various corrections by students & members of the Department of Mathematics at Normanhurst Boys High School.

Acknowledgements Pictograms in this document are a derivative of the work originally by Freepik at
http://www.flaticon.com, used under CC BY 2.0.

Symbols used Syllabus outcomes addressed

o Beware! Heed warning.
MA12-2 models and solves problems and makes informed
º Enrichment - not necessarily in the syllabus, or any
decisions about financial situations using mathematical
formal assessment.
reasoning and techniques
S2 Mathematics Standard 2 common content

A Mathematics Advanced content. MA12-4 applies the concepts and techniques of arithmetic
and geometric sequences and series in the solution of
X1 Mathematics Extension 1 content. problems

^ Literacy: note new word/phrase.

N the set of natural numbers

Z the set of integers

Q the set of rational numbers Syllabus subtopics

R the set of real numbers

∀ for all MA-M1 Modelling Financial Situations

V Gentle reminder
• For a thorough understanding of the topic, every question in this handout is to
be completed!
• Additional questions from CambridgeMATHS Year 12 Advanced
(Pender, Sadler, Ward, Dorofaeff, & Shea, 2019a) or CambridgeMATHS
Year 12 Extension (Pender, Sadler, Ward, Dorofaeff, & Shea, 2019b) will be
completed at the discretion of your teacher.
• Remember to copy the question into your exercise book!
Contents

1 Geometric series and logarithms 4

2 S2 Compound Interest 5
2.1 Simple calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Table of interest factors for compound interest . . . . . . . . . . . . . . . . . 9
2.3 Effective annual interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3 Annuities 14
3.1 Calculations by derivation using geometric series . . . . . . . . . . . . . . . . 15
3.1.1 Alternate derivation . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.1.2 Present value of an annuity . . . . . . . . . . . . . . . . . . . . . . . 24
3.2 S2 Calculations by table of interest factors . . . . . . . . . . . . . . . . . . . 25
3.2.1 Future value interest factors . . . . . . . . . . . . . . . . . . . . . . . 25
3.2.2 Other factor tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4 Loan repayments 30
4.1 Periodic deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.1.1 Types of periodic deductions . . . . . . . . . . . . . . . . . . . . . . . 30
4.2 Calculations by derivation using geometric series . . . . . . . . . . . . . . . . 31
4.2.1 ú Derivation of formula . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.2.2 Additional questions . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.2.3 Non-financial situations . . . . . . . . . . . . . . . . . . . . . . . . . 42
4.3 S2 Calculations by table of interest factors . . . . . . . . . . . . . . . . . . . 45

References 53

3
Section 1

Geometric series and logarithms

© Laws/Results
6 Sum of a geometric series to n terms:
Sn = .......................

V Important note
o When solving inequalities involving exponentials and using logarithms, be careful
of log a where |a| < 1.

Î Further exercises
o Only complete as many as required.
A Ex 8A Pender et al. (2019a) X1 Ex 14A Pender et al. (2019b)
• Q6-18
• Q6-14
A Ex 8B Pender et al. (2019a)
X1 Ex 14B Pender et al. (2019b)
• Q7-10
• Q6-11

4
Section 2

S2 Compound Interest

 Learning Goal(s)
² Knowledge 3 Skills ­ Understanding
How to solve Careful algebraic manipulation Compound interest, effective
interest rate
 By the end of this section am I able to:
34.2 Solve compound interest problems involving financial decisions, including a home loan, a savings
account, a car loan or superannuation
34.3 Use geometric sequences to model and analyse practical problems involving exponential growth and
decay
• Calculate the effective annual rate of interest and use results to compare investment returns
and cost of loans when interest is paid or charged daily, monthly, quarterly or six-monthly.

 Definition 1
Future value (F V ) of an investment is the total value of the investment at the end
of the term of investment, including all contributions and the interest earned.

 Definition 2
Present value (P V ) of an investment is the is the single amount, which if invested
at the same rate for the same period, would give that future value.

(Can also be understood as the ................. value)

6 S2 Compound Interest –

© Laws/Results
Generally,
FV = PV + I
where I is the total amount of interest earned.
Compound interest formula

F V = P V (1 + r)n ..................................

F V - Future value of the loan or amount (final balance)

P V - Present value of the loan or principal (initial quantity of money)
r - Rate of interest per compounding time period expressed as a decimal (or a
fraction)
n - Number of compounding time periods
A - Amount

V Important note
o Remember to divide the interest rate per annum by the appropriate factor to
place it on the time unit as the compounding period.
• Write the interest rate and associated unit as a decimal e.g. 0.025 p.a., 0.025
p.m.

 Definition 3
Future value interest factor (FVIF) the amount to multiply the present value by,
to obtain the future value.
FVIF
z }| {
For a compound interest calculation: F V = P V (1 + r)n

© Laws/Results
• General graph: increasing ................................ .

An
b
b
b
b
b
b
b
b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b b
b b b
b b b
b b b
b b b
b b b
n

– More frequent ...................................... ..................... will

result in a faster ..................................... of interest.

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

S2 Compound Interest – Simple calculations 7

2.1 Simple calculations

 Example 1
[2003 General Mathematics HSC Q16] Pauline calculates the present value (N )
of an annuity. The interest rate is 4% per annum, compounded monthly. In five
years the future value will be $100 000.

Which calculation will result in the correct answer?

100 000 100 000
(A) N = 5
(C) N =
(1 + 0.04) (1 + 0.04)60
100 000 100 000
(B) N= (D) N=
(1 + 0.04 ÷ 12)5 (1 + 0.04 ÷ 12)60

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

8 S2 Compound Interest – Simple calculations

 Example 2
[2020 Adv HSC Sample Q8/2019 Mathematics Standard 2 HSC Q13] The
graphs show the future values over time of $P , invested at three different rates of
compound interest.
W

X
Future value ($)

Time (years)
Which of the following correctly identifies each graph?

W 5% pa, compounding W 10% pa, compounding

annually quarterly
X 10% pa, compounding X 10% pa, compounding
(A) (C)
annually annually
Y 10% pa, compounding Y 5% pa, compounding
quarterly annually
W 5% pa, compounding W 10% pa, compounding
annually annually
X 10% pa, compounding X 10% pa, compounding
(B) (D)
quarterly quarterly
Y 10% pa, compounding Y 5% pa, compounding
annually annually

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

S2 Compound Interest – Table of interest factors for compound interest 9

2.2 Table of interest factors for compound interest

 Definition 4
Future value interest factor for a $1 investment (compound interest) is

(1 + r)n

(which may need adjustment for compounding periods other than annually)

 Example 3
[2011 General Mathematics HSC Q23] (2 marks) An amount of $5 000 is invested
at 10% per annum, compounded six-monthly.
Compounded values of $1
Interest rate per period
Period
1% 5% 10% 15% 20%
1 1.010 1.050 1.100 1.150 1.200
2 1.020 1.103 1.210 1.323 1.440
3 1.030 1.158 1.331 1.521 1.728
4 1.041 1.216 1.464 1.750 2.074
5 1.051 1.276 1.611 2.011 2.488
6 1.062 1.340 1.772 2.313 2.986

Use the table to find the value of this investment at the end of three years.

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

10 S2 Compound Interest – Effective annual interest rate

2.3 Effective annual interest rate

L Fill in the spaces
• The ............................ of compounding needs to be taken into effect
when dealing with financial contracts.
• The ...................................... ................... affects the interest
accrued.

 Definition 5
Nominal interest rate is an annual rate that does not take the compounding
frequency into account.
• Compounding periods per annum must to be specified, and the nominal rate
divided by the number of compounding periods.

 Definition 6
Effective (annualised) interest rate is converted from the nominal interest rate
into a per annum interest rate. Mostly calculated based on the principal of $1, and
re-annualised back to 1 year.

V Important note
What about the ‘comparison rate’ ? See § Mozo
• What assumptions are made?
• It gets tricky!

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

S2 Compound Interest – Effective annual interest rate 11

 Example 4
(a) $1 000 is invested at 6% p.a., compounding half yearly.
• Calculating the future value of the investment after 1 year:
 2  2
F V = $1 000 × 1 + ......... = $1 000 × ...........
 
= $1 000 × .................

6% p.a. compounding half yearly, is equivalent to ................

compounded annually.

• Nominal rate: ......... • Effective rate: .................

(b) $1 000 is now invested at 5.94% p.a. compounded monthly.

• Calculating the future value of the investment after 1 year:
 12  12
F V = $1 000 × 1 + .............. = $1 000 × ....................
 
≈ $1 000 × ....................

5.94% p.a. compounding monthly, is equivalent to .............

compounded annually.

• Nominal rate: ................. • Effective rate: ..............

(c) Which has a higher effective rate? 6% compounding half yearly, or 5.94%
compounding monthly?

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

12 S2 Compound Interest – Effective annual interest rate

© Laws/Results
­ The effective interest rate E, given a nominal rate rnom compounding m times
per year :
E = ..........................................

 Example 5
What is the effective interest rate for an investment if the nominal rate quoted is
15.75% p.a., compounding daily? Answer: 17.05

 Example 6
[2006 Mathematics General HSC Q25] (4 marks) Paul invested money in a
bank for 4 years. The stated interest rate on the account was 6.1% per annum
compounded annually. This is equivalent to an effective simple interest rate of 6.68%
per annum.

The formula Paul used to calculate the effective simple interest rate was:
(1 + r)n − 1
E= where
n • r is the stated interest rate per period
(expressed as a decimal)
• E is the effective simple interest rate per
period
(expressed as a decimal)
• n is the number of periods

Martha invested money in a different bank for 4 years. The stated interest rate on
her investment was 6% per annum compounded monthly.

Martha thinks that she has a better deal than Paul. Do you agree? Justify your
answer by comparing their effective simple interest rates.
Answer: Martha: 6.76% p.a. effective, receives a better deal

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

S2 Compound Interest – Effective annual interest rate 13

 Example 7
[2018 WACE Mathematics Applications Q16] Natalia inherits a sum of money
from her grandfather. She wishes to place it in a high-interest savings account.

She is considering the following two options:

• Account A: interest rate 4.40% per annum, compounded monthly
• Account B: interest rate 4.30% per annum, compounded daily.

(a) The effective annual interest rate for Account A is 4.49% (correct to 1
two decimal places). Determine the effective annual interest rate for
Account B.
Natalia’s bank offers her another account, C, with an interest rate of 4.50% per
annum.
(b) Under what circumstances will this interest rate and the effective 1
annual interest rate be the same?
(c) Which account (A, B or C) should Natalia choose to maximise her 2
savings? Explain your reasoning.
Answer: (a) 4.39% (b) If interest is compounded annually (c) C

Î Further exercises
A Ex 8C (Pender et al., 2019a) X1 Ex 14C (Pender et al., 2019b)
• Q2-17 • Q8-19

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

Section 3

Annuities

 Learning Goal(s)
² Knowledge 3 Skills ­ Understanding
How to solve Careful algebraic manipulation Home loan, regular savings, car
loan, superannuation
 By the end of this section am I able to:
34.4 Solve problems involving financial decisions, including but not limited to a home loan, a savings
account, a car loan or superannuation

 Definition 7
Annuity a form of investment involving a series
of equal, periodic contributions for a specified term;
interest compounding at the end of each specified
period.

• Forms of annuities:

– Superannuation – Growth questions involving discrete

– Regular savings plans units of time

14
Annuities – Calculations by derivation using geometric series 15

3.1 Calculations by derivation using geometric series

L Fill in the spaces
• Derivation of expressions will require the ............................
...................... formula, applied .............................. .
A = P (1 + r)n

where

– A is the final amount available. – r is the normalised interest rate

(to days/weeks/fortnights/months
etc)
– P is the principal amount – n is the number of compounding
invested. periods

o Carefully read when the first deposit is made.

– In calculations involving geometric series, usually the deposits are made a
the .............. of the year.
• General graph: increasing ................................ .

An
b
b
b
b
b
b
b
b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b
b b b
b b b
b b b
b b b
b b b
b b b
n

– More frequent ...................................... ..................... will

result in a faster ..................................... of interest.

§ Excel functions to be aware of:

– fv – pduration
– pmt – rate
– nper – º fvschedule - changing interest
– pv rates!

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

16 Annuities – Calculations by derivation using geometric series

 Example 8
A man invests $750 at the beginning of each year in a superannuation scheme. If the
interest is paid at the rate of 8% p.a. on the investment, compounded annually, how
much will his investment be worth after 20 years? Answer: $37 067.19

³ Steps
1. Write A1 , the amount in the account at the end of the first year.

A1 = .......................

2. Write A2 in terms of the new investment plus A1 , then simplify:

A2 = ....................................................

= ........................................................

= .........................................

3. Repeat, do so for A3 .

A3 = ....................................................

= .......................................................................................

= ...........................................................

4. Generalise to An :

An = ..........................................................................

5. Find sum of geometric progression, and apply sum of GP formula:

6. Solve to find A20 :

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Annuities – Calculations by derivation using geometric series 17

3.1.1 Alternate derivation

• Treat as a sum of n compound interest questions.

V Important note
A sum of a geometric progression always appears.

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

18 Annuities – Calculations by derivation using geometric series

 Example 9
[2007 2U HSC Q9] Mr and Mrs Caine each decide to invest some money each
year to help pay for their son’s university education. The parents choose different
investment strategies.
(i) Mr Caine makes 18 yearly contributions of $1000 into an investment 3
fund. He makes his first contribution on the day his son is born,
and his final contribution on his son’s seventeenth birthday. His
investment earns 6% compound interest per annum.

Find the total value of Mr Caine’s investment on his son’s eighteenth

birthday.
(ii) Mrs Caine makes her contributions into another fund. She contributes 2
$1000 on the day of her son’s birth, and increases her annual
contribution by 6% each year. Her investment also earns 6%
compound interest per annum.

Find the total value of Mrs Caine’s investment on her son’s third
birthday (just before she makes her fourth contribution).
(iii) Mrs Caine also makes her final contribution on her son’s seventeenth 1
birthday. Find the total value of Mrs Caine’s investment on her son’s
eighteenth birthday.

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Annuities – Calculations by derivation using geometric series 19

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

20 Annuities – Calculations by derivation using geometric series

 Example 10
[2014 JRAHS 2U Trial] Mitchell invests $50 on the 1st of every month starting
from January 2003 into a Superannuation Fund. Interest is paid at the rate of 5%
p.a. compounded monthly. Answer: i. Show. ii. $640 133.54 iii. $794 748.98 iv. $259.41

i. Show that his investment is worth $85 923.96 by the end of 2044 3
ii. Mitchell’s employer pays 9% of his monthly income into the same fund 2
for the same amount of time. If Mitchell earns $43 000 p.a. how much
is his fund worth in total at the end of 2044?
iii. Assuming that Mitchell and his boss pay as stated in parts i. and (ii), 3
calculate the value of Mitchell’s fund at the end of 2044 if the interest
rate increases to 6% at the beginning of 2020.
iv. Using the information from part (ii) and using the original interest rate 2
only, find the amount that Mitchell must invest each month if he wishes
to have a superannuation fund value of $1 000 000 in total.

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Annuities – Calculations by derivation using geometric series 21

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

22 Annuities – Calculations by derivation using geometric series

 Example 11
[2014 CSSA 2U Trial] Monica invests $250 into an account at the Bank of Newton.
She invests the money at the beginning of each month for n years. Interest is to be
paid at a rate of 6% p.a. compounded monthly.
i. Show that the total value of her investment An at the end of n years is 2
given by

An = $250 1.005 + 1.0052 + · · · + 1.00512n
ii. Find the value of the investment at the end of 7 years. 2
iii. What single investment at the beginning of the 7 years would yield the 2
same final value for Monica? You may assume interest is compounded
monthly.

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Annuities – Calculations by derivation using geometric series 23

 Example 12
[2009 General Mathematics HSC Q17] Sally decides to put $100 per week into her
superannuation fund. The interest rate quoted is 8% per annum, compounded weekly.

Which expression will calculate the future value of her superannuation at the end of
35 years?   35   1820 
 0.08   0.08 
 1 + 52 − 1  1 + 52 − 1

  
 
 
(A) 100 (C) 100

 0.08 
 
 0.08 

   
 52   52 
( ) ( )
(1 + 0.08)35 − 1 (1 + 0.08)1820 − 1
(B) 100 (D) 100
0.08 0.08

V Important note
o Students in General Mathematics were given a formula. Question can still
be attempted by Mathematics Advanced students by quickly deriving the terms
required.

Î Further exercises
A Ex 8D (Pender et al., 2019a) X1 Ex 14D (Pender et al., 2019b)
• Q1-21 • Q3-11

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

24 Annuities – Calculations by derivation using geometric series

3.1.2 Present value of an annuity

 Example 13
[2002 General Mathematics HSC Q15] Calculate the present value of an annuity
in which $1 200 is invested at the end of every year for ten years and interest is paid
annually at a rate of 5% per annum. (Answer to the nearest dollar.)
(A) $1 922 (B) $9 266 (C) $15 093 (D) $30 654

Answer: (B)

V Important note
o Students in General Mathematics were given a formula. Question can still be
attempted by Mathematics Advanced students by quickly deriving the terms
required. Refer to Definition 2 on page 5 for this question.

o $1 200 is not the present value of the annuity!

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Annuities – S2 Calculations by table of interest factors 25

3.2 S2 Calculations by table of interest factors

3.2.1 Future value interest factors

o Read the tables very carefully!

o By convention, the first deposit is made at the end of the first year!

 Example 14
[2005 Mathematics General HSC Q26] Rod is saving for a holiday. He deposits
$3 600 into an account at the end of every year for four years. The account pays 5%
per annum interest, compounding annually.

The table shows future values of an annuity of $1.

Future values of an annuity of $1

End of Interest rate

year 1% 2% 3% 4% 5%
1 1.0000 1.0000 1.0000 1.0000 1.0000
2 2.0100 2.0200 2.0300 2.0400 2.0500
3 3.0301 3.0604 3.0909 3.1216 3.1525
4 4.0604 4.1216 4.1836 4.2465 4.3101
5 5.1010 5.2040 5.3091 5.4163 5.5256
6 6.1520 6.3081 6.4684 6.6330 6.8019
7 7.2135 7.4343 7.6625 7.8983 8.1420
8 8.2857 8.5830 8.8923 9.2142 9.5491

i. Use the table to find the value of Rod’s investment at the end of four 2
years.
ii. How much interest does Rod earn on his investment over the four years? 2

Answer: i. $15 516.36 ii. $1 116.36

• Identify the interest factor by a geometric series at the end of the 4th year.

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

26 Annuities – S2 Calculations by table of interest factors

 Example 15
[2009 General Mathematics HSC Q27] The table shows the future value of a $1
annuity at different interest rates over different numbers of time periods.
Future values of a $1 annuity

Time Interest rate

Period 1% 2% 3% 4% 5%
1 1.0000 1.0000 1.0000 1.0000 1.0000
2 2.0100 2.0200 2.0300 2.0400 2.0500
3 3.0301 3.0604 3.0909 3.1216 3.1525
4 4.0604 4.1216 4.1836 4.2465 4.3101
5 5.1010 5.2040 5.3091 5.4163 5.5256
6 6.1520 6.3081 6.4684 6.6330 6.8019
7 7.2135 7.4343 7.6625 7.8983 8.1420
8 8.2857 8.5830 8.8923 9.2142 9.5491

i. What would be the future value of a $5 000 per year annuity at 3% per 1
annum for 6 years, with interest compounding yearly?
ii. What is the value of an annuity that would provide a future value of 1
$407 100 after 7 years at 5% per annum compound interest?
iii. An annuity of $1 000 per quarter is invested at 4% per annum, 3
compounded quarterly for 2 years. What will be the amount of interest
earned?

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Annuities – S2 Calculations by table of interest factors 27

 Example 16
[2020 Adv HSC Sample Q34/2019 Mathematics Standard 2 HSC Q42] (3
marks) The table shows the future values of an annuity of $1 for different interest
rates for 4, 5 and 6 years. The contributions are made at the end of each year.
Future value of an annuity of $1

Interest rate per annum

Years
1% 2% 3% 4%
4 4.060 4.122 4.184 4.246
5 5.101 5.204 5.309 5.416
6 6.152 6.308 6.468 6.633

An annuity account is opened and contributions of $2 000 are made at the end of
each year for 7 years.

For the first 6 years, the interest rate is 4% per annum, compounding annually.
For the 7th year, the interest rate increases to 5% per annum, compounding annually.

Calculate the amount in the account immediately after the 7th contribution is made.
Answer: 15 929.3

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

28 Annuities – S2 Calculations by table of interest factors

 Example 17
[2021 Adv HSC Q25] (3 marks) A table of future value interest factors for an
annuity of $1 is shown.
Table of future value interest factors

Number Interest rate per period

of
periods 0.25% 0.5% 0.75% 1% 1.25%
2 2.0025 2.0050 2.0075 2.0100 2.0125
4 4.0150 4.0301 4.0452 4.0604 4.0756
6 6.0376 6.0755 6.1136 6.1520 6.1907
8 8.0704 8.1414 8.2132 8.2857 8.3589
10 10.1133 10.2280 10.3443 10.4622 10.5817

Simone deposits $1000 into a savings account at the end of each year for 8 years.
The interest rate for these 8 years is 0.75% per annum, compounded annually.

After the 8th deposit, Simone stops making deposits but leaves the money in the
savings account. The money in her savings account then earns interest at 1.25% per
annum, compounded annually, for a further two years.

Find the amount of money in Simone’s savings account at the end of ten years.
Answer: $8419.81

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Annuities – S2 Calculations by table of interest factors 29

3.2.2 Other factor tables

 Example 18
[2016 Mathematics General 2 HSC Q28] (2 marks) The table gives the
contribution per period for an annuity with a future value of $1 at different interest
rates and different periods of time.
Contribution per period for an annuity with a future value of $1

Number Interest rate

of (% per period)
periods 0.25% 0.5% 0.75% 1% 1.25% 1.5%
6 0.1656 0.1646 0.1636 0.1625 0.1615 0.1605
12 0.0822 0.0811 0.0800 0.0788 0.0778 0.0767
18 0.0544 0.0532 0.0521 0.0510 0.0499 0.0488
24 0.0405 0.0393 0.0382 0.0371 0.0360 0.0349
30 0.0321 0.0310 0.0298 0.0287 0.0277 0.0266
36 0.0266 0.0254 0.0243 0.0232 0.0222 0.0212

Margaret needs to save $75 000 over 6 years for a deposit on a new apartment.
She makes regular quarterly contributions into an investment account which pays
interest at 3% pa.

How much will Margaret need to contribute each quarter to reach her savings goal?
Answer: $2 865

Î Further exercises
A Ex 8F - Click here for PDF X1 Ex 14F - Click here for PDF
• All questions • All questions

Note these exercises are separate PDFs to the printed textbook.

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

Section 4

Loan repayments

4.1 Periodic deductions

 Learning Goal(s)
² Knowledge 3 Skills ­ Understanding
Geometric sequences Careful algebraic manipulations Home loans, regular savings, car
loan, superannuation
 By the end of this section am I able to:
34.3 Use geometric sequences to model and analyse practical problems involving exponential growth and
decay
34.4 Solve problems involving financial decisions, including but not limited to a home loan, a savings
account, a car loan or superannuation

4.1.1 Types of periodic deductions

• “Time”/Loan repayment involving reducible interest (compound interest analogue)
• Simultaneous growth/decay involving discrete units of time.

© Laws/Results
• General graph: decreasing ................................. .

An
b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b b
b
b
b
b
b
b
n

– More frequent ............. ................................. will result in a

faster .............................. of the entire loan.

V Important note
o An = .... when loan is repaid.
o Be aware of special conditions that apply to loan, such as multiple repayments
prior to interest calculation.
Loan repayments – Calculations by derivation using geometric series 31

4.2 Calculations by derivation using geometric series

4.2.1 ú Derivation of formula
 Example 19
Natasha and Richard take out a loan of $200 000 on 1st January 2002 to buy a house.
Interest is charged at 12% p.a., compounded monthly, and they will repay the loan
in monthly instalments of $2 200.
(a) Find the amount owing at the end of n months.
(b) Find how long it takes to repay:

i the full loan, ii half the loan.

(c) How long would repayment take if they were able to pay $2 500 per month?
(d) Why would instalments of $1 900 per month never repay the loan?
Answer: (a) An = 220 000 − 1.01n × 20 000 (b) i. 20 yrs 1 mth ii. 15 yrs (c) 13 yrs 6 mths

³ Steps
(a) Find the amount owing at the end of n months

1. Write A1 , the amount in the account at the end of the first month.

A1 = ...................................................

2. Write A2 after having accumulated interest, based on A1 , but subtracting

repayment:

A2 = ........................................

= .........................................................................................

= ............................................................................

3. Repeat, do so for A3 .

A3 = ........................................

= ...................................................................................................

= ...............................................................................................

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

32 Loan repayments – Calculations by derivation using geometric series

³ Steps
(a) Find the amount owing at the end of n months
(continued from previous page)
4. Generalise to An :

An = ...................................

...............................................................................................

5. Find sum of geometric progression, and apply sum of GP formula:

Sn = ....................... = .............................

= ..................................

6. Solve to find An :

An = ..............................................................................................

= .....................................................................................

= ......................................................

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – Calculations by derivation using geometric series 33

V Important note
A sum of a geometric progression always appears.

 Example 20
[2012 2U HSC Q15] Ari takes out a loan of $360 000. The loan is to be repaid
in equal monthly repayments, $M , at the end of each month, over 25 years (300
months). Reducible interest is charged at 6% per annum, calculated monthly.

Let $An be the amount owing after the n-th repayment.

i. Write down an expression for the amount owing after two months, $A2 . 1
ii. Show that the monthly repayment is approximately $2 319.50. 2
iii. After how many months will the amount owing, An , become less than 3
$180 000?

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

34 Loan repayments – Calculations by derivation using geometric series

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – Calculations by derivation using geometric series 35

 Example 21
[2000 2U Trial Q10] A store offers a loan of $5 000 on a computer for which it
charges interest at the rate of 1% per month. As a special deal, the store does not
charge interest for the first three months however, the first repayment is due at the
end of the first month.

A customer takes out the loan and agrees to repay the loan over three years by
making 36 equal monthly repayments of $M . Let $An be the amount owing at the
end of the n-th repayment.
i. Find an expression for A3 . 1
ii. Show that A5 = (5 000 − 3M ) 1.012 − M (1 + 1.01) 1
iii. Find an expression for A36 . 2
iv. Find the value of M . 2

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

36 Loan repayments – Calculations by derivation using geometric series

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – Calculations by derivation using geometric series 37

 Example 22
[2003 2U HSC Q10] Barbara borrows $120 000 to be repaid over a period of 25
years at 6% per annum reducible interest. Each year there are k regular repayments
of $F . Interest is calculated and charged just before each repayment.
i. Write down an expression for the amount owing after two repayments. 1
ii. Show that the amount owing after n repayments is 2
kF (αn − 1)
An = 120 000αn −
0.06
0.06
where α = 1 + .
k
iii. Calculate the amount of each repayment if the repayments are made 2
quarterly (ie. k = 4).
iv. How much would Barbara have saved over the term of the loan if she 2
had chosen to make monthly rather than quarterly repayments?

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

38 Loan repayments – Calculations by derivation using geometric series

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – Calculations by derivation using geometric series 39

 Example 23
[2006 2U HSC Q8] Joe borrows $200 000 which is to be repaid in equal monthly
instalments. The interest rate is 7.2% per annum reducible, calculated monthly.

It can be shown that the amount, $An , owing after the n-th repayment is given by
the formula:

An = 200 000rn − M 1 + r + r2 + · · · + rn−1
where r = 1.006 and $M is the monthly repayment (Do NOT show this).
i. The minimum monthly repayment is the amount required to repay the 3
loan in 300 instalments.

Find the minimum monthly repayment.

ii. Joe decides to make repayments of $2 800 each month from the start of 2
the loan.

How many months will it take for Joe to repay the loan?

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

40 Loan repayments – Calculations by derivation using geometric series

 Example 24
[2021 Adv HSC Q29]
(a) On the day that Megan was born, her grandfather deposited $5 000 2
into an account earning 3% per annum compounded annually. On
each birthday after this, her grandfather deposited $1 000 into the
same account, making his final deposit on Megan’s 17th birthday.
That is, a total of 18 deposits were made.

Let An be the amount in the account on Megan’s n-th birthday, after

the deposit is made.

Show that A3 = $8 554.54

(b) On her 17th birthday, just after the final deposit is made, Megan has 3
$30 025.83 in her account. You are NOT required to show this.

Megan then decides to leave all the money in the same account
continuing to earn interest at 3% per annum compounded annually.
On her 18th birthday, and on each birthday after this, Megan
withdraws $2 000 from the account.

How many withdrawals of $2 000 will Megan be able to make?

Answer: n = 20.249 · · · (20 withdrawals)

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – Calculations by derivation using geometric series 41

4.2.2 Additional questions

1. [2009 2U HSC Q8] One year ago Daniel borrowed $350 000 to buy a house. The
interest rate was 9% per annum, compounded monthly. He agreed to repay the loan
in 25 years with equal monthly repayments of $2 937.
i. Calculate how much Daniel owed after his first monthly repayment. 1
ii. Daniel has just made his 12th monthly repayment. He now owes 3
$346 095. The interest rate now decreases to 6% per annum, compounded
monthly.

The amount, $An , owing on the loan after the n-th monthly repayment
is now calculated using the formula

An = 346 095 × 1.005n − 1.005n−1 M − · · · − 1.005M − M

where $M is the monthly repayment, and n = 1, 2, . . . , 288. (Do NOT

prove this formula).

Calculate the monthly repayment if the loan is to be repaid over the

remaining 24 years (288 months).
iii. Daniel chooses to keep his monthly repayments at $2 937. Use the 3
formula in part (ii) to calculate how long it will take him to repay the
$346 095.
iv. How much will Daniel save over the term of the loan by keeping his 1
monthly repayments at $2 937, rather than reducing his repayments to
the amount calculated in part (ii)?

Answers
1. (i) $349 688 (ii) $2 270.31 (iii) n = 178.3733 · · · ≈ 14 yrs 11 mths (iv) $129 966.90 or $128 126.90 (if using 179 mths)

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

42 Loan repayments – Calculations by derivation using geometric series

4.2.3 Non-financial situations

 Example 25
[2020 Mathematics Advanced Sample HSC Q36] An island initially has 16 100
trees. The number of trees increases by 1% per annum. The people on the island cut
down 1 161 trees at the end of each year.
(a) Show that after the first year there are 15 100 trees remaining. 1
(b) Show that at the end of 2 years the number of trees remaining is given 2
by the expression

T2 = 16 100 × (1.01)2 − 1 161(1 + 1.01)

(c) Show that at the end of n years the number of trees remaining is given 2
by the expression

Tn = 116 100 − 100 000 × (1.01)n

(d) For how many years will the people on the island be able to cut down 1
1 161 trees annually?
Answer: ≈ 15 years

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – Calculations by derivation using geometric series 43

 Example 26
[1998 2U HSC Q10] A fish farmer began business on 1 January 1998 with a stock
of 100 000 fish. He had a contract to supply 15 400 fish at a price of $10 per fish to
a retailer in December each year. In the period between January and the harvest in
December each year, the number of fish increases by 10%.
Answer: i. 88 660 ii. Show iii. $169 400 iv. 7 yrs, 12/2005

i. Find the number of fish just after the second harvest in December 1999. 1
ii. Show that Fn , the number of fish just after the n-th harvest, is given by 2

Fn = 154 000 − 54 000(1.1)n

iii. When will the farmer have sold all his fish, and what will his total 2
income be?
iv. Each December the retailer offers to buy the farmer’s business by paying 2
$15 per fish for his entire stock. When should the farmer sell to maximise
his total income?

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

44 Loan repayments – Calculations by derivation using geometric series

Î Further exercises
A Ex 6E (Pender, Sadler, Shea, & Ward,X1 Ex 14E (Pender et al., 2019b)
2009)
• Q5-13 • Q5-13

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – S2 Calculations by table of interest factors 45

4.3 S2 Calculations by table of interest factors

 Definition 8
The present value of a loan is the original loan balance.

 Definition 9
The present value interest factor (P V IF ) for a loan is the ......................
of the regular loan repayment amount to pay off the loan plus reducible interest.

A0 = M × P V IF

where
• A0 is the original loan balance.
• P V IF is the present value interest factor.
• M is the regular repayment amount.

 Example 27
[2015 Independent General 2 Trial HSC Q30] (with modifications) Jackson has
a personal loan of $15 000 and has to repay this loan in equal monthly payments over
4 years. The interest rate on Jackson’s loan is 7.8% pa.
Additional insertion
(a) If M is the monthly repayment amount, show that 3
 n  n 
2 013 2000M 2 013
An = 15 000 × − −1
2 000 13 2 000
(b) When the loan is repaid, A48 = 0. 2

By changing the subject of the A48 expression to 15 000, show that the
present value interest factor is approximately 41.1199.

Original question The following table shows the present value interest factors for
reducing balance loans at various monthly interest rates (r) over different time periods
(N ).

r
N 0.0060 0.0065 0.0070 0.0075 0.0080 0.0085
45 39.3341 38.9074 38.4871 38.0732 37.6655 37.2638
46 40.0935 39.6497 39.2126 38.7823 38.3586 37.9413
47 40.8484 40.3871 39.9331 39.4862 39.0462 38.6131
48 41.5988 41.1199 40.6486 40.1848 39.7284 39.2792
49 42.3448 41.8478 41.3590 40.8782 40.4051 39.9398
50 43.0862 42.5711 42.0646 41.5664 41.0765 40.5947

i. Write down the present value interest factor from the table associated 1
with Jackson’s loan.
ii. Calculate the interest that Jackson will pay over the term of his loan. 2

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

46 Loan repayments – S2 Calculations by table of interest factors

Modelling Financial Situations NORMANHURST BOYS’ HIGH SCHOOL

Loan repayments – S2 Calculations by table of interest factors 47

 Example 28
[2016 NBHS General 2 Trial HSC Q26] The table shows present value interest
factors for some monthly interest rates (r) and loan terms in months (N ).

Each number in the table below is the present value of an annuity of $1 at the end
of each period.
Term Monthly interest rate (as a decimal)
(mths) 0.004 0.0045 0.005 0.0055 0.006 0.0065 0.007
106 86.26 84.15 82.12 80.16 78.26 76.43 74.66
107 86.91 84.77 82.71 80.72 78.79 76.93 75.13
108 87.56 85.39 83.29 81.27 79.32 77.43 75.60
109 88.20 86.00 83.87 81.82 79.84 77.92 76.07
110 88.85 86.61 84.45 82.37 80.35 78.41 76.53
111 89.49 87.22 85.03 82.91 80.87 78.90 77.00
112 90.13 87.82 85.60 83.45 81.38 79.38 77.45
113 90.77 88.43 86.17 83.99 81.89 79.86 77.91
114 91.40 89.03 86.73 84.53 82.40 80.34 78.36
115 92.03 89.62 87.30 85.06 82.90 80.82 78.81
116 92.66 90.22 87.86 85.59 83.40 81.29 79.25
117 93.29 90.81 88.42 86.11 83.89 81.76 79.70
118 93.91 91.40 88.97 86.64 84.39 82.22 80.13
119 94.54 91.98 89.52 87.16 84.88 82.68 80.57
120 95.16 92.57 90.07 87.68 85.37 83.14 81.00
121 95.77 93.15 90.62 88.19 85.85 83.60 81.43
122 96.39 93.72 91.16 88.70 86.33 84.05 81.86
123 97.00 94.30 91.71 89.21 86.81 84.50 82.28
Mr Anderson borrows $65 000 for home improvements. He repays the loan with
monthly repayments over 10 years. He is charged 6% p.a. interest.
i. Calculate the amount of his monthly instalment, correct to the nearest 1
cent.
ii. How much less interest would he pay if he took the loan over 9 years 2
instead of 10?
Answer: i. 721.66 ii. 2 314.92

NORMANHURST BOYS’ HIGH SCHOOL Modelling Financial Situations

48 Loan repayments – S2 Calculations by table of interest factors

฀ ฀
 Example 29
[2015 Mathematics General 2 HSC Q30] The table gives the present value interest
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
factors for an annuity of $1 per period, for various interest rates (r) and numbers of
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
periods (N ).
Table of present value interest factors
r ฀ ฀ ฀ ฀ ฀ ฀
N

i. Oscar plans to invest $200 each month for 74 months. His investment 1
฀ ฀ interest
will earn ฀ at฀ the
฀ rate ฀of 0.0080
฀ ฀ a decimal)
(as ฀ ฀ ฀ per month.
฀ ฀ ฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
Use the information in the table to calculate the present value of this

฀
฀ ฀
annuity. ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
ii. Lucy is using the same table to calculate the loan repayment for her 2

฀
car loan.฀ Her loan is $21 500 and will be repaid in equal monthly
repayments over 6 years. The interest rate on her loan is 10.8% per

฀
annum. ฀

฀
Calculate฀ the amount of each monthly repayment, correct to the nearest

฀
dollar. ฀
Answer: i. $11136.89 ii. $407

฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
V Important฀ note ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
o The present value of an annuity (See Example 13 on page฀ 24)฀ is
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ subtly different
to that of a loan (Definition 8 on page 45).
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀

฀
Î Further
฀ exercises
A Ex 8G - Click here for PDF X1 Ex 14G - Click here for PDF
฀
• All questions • All questions

Note these exercises are separate PDFs to the printed textbook.

Modelling Financial Situations

฀ ฀ NORMANHURST BOYS’ HIGH SCHOOL

฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
NESA Reference Sheet – calculus based courses

NSW Education Standards Authority

2020 HIGHER SCHOOL CERTIFICATE EXAMINATION

Mathematics Advanced
Mathematics Extension 1
Mathematics Extension 2

–1–
–2–
–3–
–4– © 2018 NSW Education Standards Authority
References

Pender, W., Sadler, D., Shea, J., & Ward, D. (2009). Cambridge Mathematics 2 Unit Year 12 (2nd
ed.). Cambridge University Press.
Pender, W., Sadler, D., Ward, D., Dorofaeff, B., & Shea, J. (2019a). CambridgeMATHS Stage 6
Mathematics Advanced Year 12 (1st ed.). Cambridge Education.
Pender, W., Sadler, D., Ward, D., Dorofaeff, B., & Shea, J. (2019b). CambridgeMATHS Stage 6
Mathematics Extension 1 Year 12 (1st ed.). Cambridge Education.

53