ADDITIONAL MATHEMATICS

SBA

Britney Durham
Table of Contents
TITLE: ............................................................................................................................................................... 3

PROBLEM STATEMENT:.................................................................................................................................... 3

MATHEMATICAL FORMULATION: .................................................................................................................... 4

PROBLEM SOLUTION: .................................................................................................................................... 10

APPLICATION OF SOLUTION: .......................................................................................................................... 11

DISCUSSION OF FINDINGS:............................................................................................................................. 12

CONCLUSION: ................................................................................................................................................ 13

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TITLE:
Investment advice on saving towards tertiary education.

PROBLEM STATEMENT:
Molly wishes to invest $25000 towards her 3 year old grandchild’s university
education. She would like to make that investment immediately, but needs
some advice before making a final decision.

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MATHEMATICAL FORMULATION:

Let P= amount of money to be invested

T= length of time the money is to be invested

R= interest rate represented as a decimal

Molly’s principal is $25000.

The average age that a child enters secondary school is 11. If the child wishes
to attend University of the West Indies (UWI), he or she must attend secondary
school for 7 years to achieve CAPE passes. Therefore, the average age of a
person entering UWI is 11 plus 7 i.e. 18. Since the child is 3 years old at
present, he or she has 15 years until entering UWI and thus your investment
should be a minimum of 15 years.
Scotia Bank of Trinidad and Tobago offers an interest rate of 2% (0.02 as a
decimal) compounded annually on their Educational Saving Plan.

Interest on money is always calculated by multiplying principal by the interest

rate. The amount of money at the end of each year can be determined in two
ways:
1. Simple Interest
2. Compound Interest

Simple Interest
For simple interest calculations, the principal is multiplied by the rate. Each
year an additional fixed amount (simple interest/PR) is added to the principal.
The amount at the end of year 1 is obtained by adding the principal to the
simple interest PR and the amount at the end of year 2 is obtained by adding
2PR to the principal. A few years of your investment is done as an example:

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Table 1
Year(T) Principal(P) Simple Interest (PR) Amount(A)
1 $25000 $25000*0.02= $500 $25000+$500= $25500
2 $25000 $25000*0.02= $500 $25000+$500+$500=$26000
3 $25000 $25000*0.02= $500 $25000+$500+$500+$500=$26500
4 $25000 $25000*0.02= $500 $25000+$500+$500+$500+$500=$27000

The above table can be expressed in general terms as:

Table 2
Year(T) Principal(P) Simple Interest(PR) Amount(A)
1 P PR P+PR
2 P PR P+PR+PR= P+2PR
3 P PR P+PR+PR+PR= P+3PR
4 P PR P+PR+PR+PR+PR=P+4PR

Arithmetic Progression
In Table 1 and Table 2, a pattern is seen where a fixed amount of money is
being added at the end of each year. That fixed amount of money is $500
which in general terms is PR. Each year an additional PR is added to the
Principal. This means that by the end of 15 years the simple interest would be
15PR or 15* $500= $7500. Therefore the total amount of money you would
have at the end of the 15 years would be P+15PR= $32500.
In mathematics, we call these patterns Arithmetic Progressions (APs). An
Arithmetic Progression is a sequence of numbers which increase by a constant
amount (+ or -). This constant amount is known as the common difference (d)
which in this case is PR ($500) and the starting number is called the first term
(a).
The general form of an Arithmetic Progression is a, a+d, a+d+d, a+d+d+d..
Note that a+d+d can also be written as a+2d and a+d+d+d can be written as
a+3d.
The general formula of the nth term an AP is a+(n-1)d

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The form of our AP would look like P, P+PR, P+PR+PR, P+PR+PR+PR.. or P+PR,
P+2PR, P+3PR..
Since P is our first term and PR is our common difference then we can come up
with a formula similar to the general formula of an AP to calculate nth terms.
In maths, the term of n refers to the algebraic representation of any given term
in the sequence.
As shown in our AP since we can use P+PR to calculate the amount of money at
the end of year 1, P+2PR to calculate the amount at the end of year 2 and
P+3PR to calculate the amount at the end of year 3 then the number in front of
PR represents the year we wish to know the value of.
Therefore An= P+(PR)T can be used to calculate nth terms of an AP.
Where An is the nth term.
t is the year you wish to know the value of.

Simple Interest Graph (Steady Growth)

Amount was plotted against Year and the amount of money at the end of each
year showed a straight line graph.

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Compound Interest
Compound interest is calculated by multiplying the interest rate by the
principal and adding the product of that to the principal. The sum of that
product and the principal becomes the principal for the next time period.
For example, assuming that there is no increase or decrease of Compound
Interest during the years, the amount of money you would have at the end of
four years can be calculated as shown below.
Table 3

Year Principal (P) Compound Interest (PR) Amount(A)

(T)
1 $25000 $25000*0.02= $500.00 $25000+($25000*0.02)=
$25500.00
2 $25000+($25000*0.02) ($25000+25000*0.02)*0.02= $25000+($25000*0.02)+
$510 ($25000+25000*0.02)*0.02=
$26010.00

3 $25000+($25000*0.02)+ ($25000+($25000*0.02)+ $25000+($25000*0.02)+

($25000+25000*0.02)*0 ($25000+25000*0.02)*0.02)*0. ($25000+25000*0.02)*0.02+($
.02 02)= $520.20 25000+($25000*0.02)+
($25000+25000*0.02)*0.02)*0.
02)=$26530.20

As you can see, the amount at the end of year 1 became the principal for year
2. This pattern would always continue, the amount at the end of year 2 would
become the principal for year 3 and the amount at the end of year 3 would
become the principal for year 4.

The above table can be mathematically expressed as:

Table 4

Year(T) Principal (P) Compound Interest Amount(A)

1 P PR P+PR

2 P+PR (P+PR)R= PR+PR2 P+PR+PR(1+R)

=PR(1+R) = PR2+2PR+P

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 3 PR2+2PR+P (PR2+2PR+P)R= PR3+2PR2+PR PR2+2PR+P+
PR3+2PR2+PR=PR3+3PR2+3PR+P

Geometric Progression
In Table 4, the amount in year 1, year 2 and year 3 were factorized and the
results were P(1+R) , P(1+R)2 and P(1+R)3 respectively. This told me that for
each year, the amount calculated follows a pattern. This pattern is a sequence
of numbers where each term after the first is found by multiplying the previous
one by a fixed number called a common ratio. Our common ratio in this case
would be (1+R). In mathematics, we call these types of sequences Geometric
Progressions (GPs).
The general form of a Geometric Progression is a, ar, ar2, ar3, ar4... and the
general formula is
An=arn-1
Where An is the nth term.
a is the first term
r is the common ratio
n is term you wish to know the value of

In our case the form of the Geometric Progression is P, P(1+R), P(1+R)2,

P(1+R)3, P(1+R)4...
Knowing that (1+R) is our common ratio and P is our first term then we can
come up with a formula similar to the general formula of a geometric
progression to calculate nth terms.
As shown in our Geometric Progression, since we can use P(1+R) to calculate
the amount of money you would have at the end of year 1, P(1+R)2 to
calculate year 2 and P(1+R)3 to calculate year 3, then the power represents the
year you wish to calculate the amount for.
Therefore An= P (1+R)T can be used to calculate nth terms of a GP.

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Compound Interest Graph (Exponential Growth)

Amount was plotted against Year and the result showed an exponential
growth.

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PROBLEM SOLUTION:

Because compound interest grows your money at an exponential rate, it is the

better interest to use when you invest your money.

Assuming that there is no increase or decrease of interest rate during the years
of your investment, here is a look at how much money you’d have at the end
of each year of your investment using Compound Interest:

(Excel was used to make calculations easier)

Year (T) Principal (P) Compound Interest Rate (R) Amount (A) [P(1+R)^T)]

1 $ 25,000.00 0.02 $ 25,500.00

2 $ 25,000.00 0.02 $ 26,010.00
3 $ 25,000.00 0.02 $ 26,530.20
4 $ 25,000.00 0.02 $ 27,060.80
5 $ 25,000.00 0.02 $ 27,602.02
6 $ 25,000.00 0.02 $ 28,154.06
7 $ 25,000.00 0.02 $ 28,717.14
8 $ 25,000.00 0.02 $ 29,291.48
9 $ 25,000.00 0.02 $ 29,877.31
10 $ 25,000.00 0.02 $ 30,474.86
11 $ 25,000.00 0.02 $ 31,084.36
12 $ 25,000.00 0.02 $ 31,706.04
13 $ 25,000.00 0.02 $ 32,340.17
14 $ 25,000.00 0.02 $ 32,986.97
15 $ 25,000.00 0.02 $ 33,646.71

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APPLICATION OF SOLUTION:

Geometric Progressions are found in our everyday lives such as the amount of
money in our savings account, the size of a population in exponential growth
e.g. bacteria in leftovers and the intensity of radioactive decay after n years of
a given radioactive material.

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DISCUSSION OF FINDINGS:
Arithmetic and Geometric Progressions can be used in finance to determine
how interest-bearing investments accrue with time.
The evolution of your investment using compound interest showed a
Geometric Progression where each year the amount of money grew
exponentially with the result of your total increase being $8646.71.
On the contrary, the growth of your investment using simple interest showed
an Arithmetic Progression where each year the money grew at a steady
amount and because of that your total increase would only be $7500.00.
Therefore you would have $1146.71 more using compound interest than
simple interest at the end of your investment thus why compound interest is
the better interest to use when you invest your money.

Being that this is an investment for tertiary education, it is important to know

the financial information of UWI.
The cost of the academic year of UWI varies and depends on the programme
being taken. Assuming that there is no increase or decrease of costs and that
your grandchild does not require meals or accommodations from UWI, the cost
of each of your grandchild’s academic year can roughly be about $15000
(including compulsory fees).

Above snippet was taken from

https://sta.uwi.edu/resources/documents/UndergraduateFeeBklt.pdf

At the end of your 15 year investment with Scotia Bank Trinidad and Tobago,
you would have a total of $33,646.71 which may only send your grandchild to
university for about 3 years. I suggest that you inform your grandchild’s

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parents and or other relatives of your plan to convince them into depositing
money every month to the account so that your grandchild can continue going
to university for more than just 3 years.
However, the formula I used to calculate future amounts i.e. An=P(1+R)T ,would
not be the formula that the bank would use if you decide to deposit money
monthly. The formula would be far more complex and beyond my
understanding as I haven’t reached that level of mathematics yet.

CONCLUSION:
I suggest that you invest your money in Scotia Bank Trinidad and Tobago for 15
years where you would have $33,646.71 at the end of your investment.

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