4.

FINANCIAL MATHEMATICS

LOANS AND ANNUITIES

Since the Global Financial Crisis (GFC) of 2008, ideas and expectations about
superannuation and saving for the future have changed significantly. Given that a boy
and girl born today in Australia can expect to live to 80.3 and 84.4 years respectively,
it is understandable that annuities have gained popularity over traditional term deposits
as people are living longer. Annuities are considered to be low-risk and involve investing
money to provide a series of guaranteed, regular payments over a set number of years (or
even for life).

CHAPTER OUTLINE
F4.2 4.01 Reducing balance loans
F4.2 4.02 Credit cards
F5 4.03 Annuities
F5 4.04 Loan repayment tables
F5 4.05 Repaying a home loan
IN THIS CHAPTER YOU WILL:
• examine the progress of a reducing balance loan after each repayment
• calculate the repayments, duration, interest and total amount paid in a reducing balance loan
• calculate the costs and conditions involved in credit card purchases, interest and fees
• solve problems involving annuities, including calculating the duration and future value
• use a future value table to calculate the future value of an annuity (FVA), the interest earned and
the contribution per period
• use a loan repayment table to calculate repayments, total amount and interest paid for a
reducing balance loan
• calculate the fees and charges associated with having a home loan
• compare different types of home loans using graphs and calculations, including different
payment options.

iStock/Getty Images Plus/maxsattana

 TERMINOLOGY
annual fee annuity balance owing
cash advance compound interest contribution
credit card deposit fee
flat-rate loan future value future value of an annuity (FVA)
interest-free period loan repayment table minimum payment
mortgage personal loan principal
reducing balance loan repayment statement period
transactions

WS
SkillCheck
Homework 4
Assignment

1 How many:
a fortnights in 18 months? b months in 25 years?
1
c weeks in 20 years? d quarters in 6 years?
2

2 Complete each blank, correct to 4 decimal places where necessary.

a 12% p.a. = _________% per quarter b 9% p.a. = _________% per month
c 14.3% p.a. = _________% per day d 6.75 % p.a. = ___________% per day

3 Evaluate each expression, correct to 2 decimal places.

0.034
a 1500 × × 21
365
0.43
b 76 240 × × 155
100
4 Copy and complete each statement.
a Payments of $1200 per fortnight = $ _____ per year
b $895 payments per week = $ ______ per year
c Paying $3450 per month = $ ______ over 5 years

0.43
5 Evaluate 250 000 + 250 000 × − 1680.
100
6 If P = 870 000, I = 870 000 × 0.00375 and R = $5624, evaluate P + I − R.

116 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

4.01  Reducing balance loans WS

A reducing balance loan is calculated on the balance owing on the loan, not on the original Homework
Reducing
principal borrowed as with a flat-rate loan. You pay less interest on a reducing balance loan balance loan
grids
because the interest decreases as the balance owing decreases.
You can save interest and pay off a reducing balance loan more quickly by:
• making repayments more frequently, for example, weekly or fortnightly rather than monthly
• making extra payments of any size from time to time, for example, if you receive a bonus
or pay rise at work
• increasing the size of each repayment (even by just a few dollars).

EXAMPLE 1
Reducing
Claire borrowed $595 000 to buy a studio apartment at 6.25% p.a. reducible interest. balance loans

She made monthly payments of $3925. The table shows the progress of the loan for the
first 2 months.

Reducing balance loan for Claire’s studio apartment

Amount borrowed $595 000
Interest rate (% p.a.) 6.25
Monthly repayment (R) $3925
Month (n) Principal (P) Interest (I ) Amount owing Balance
before repayment (P + I − R)
(P + I )
1 $595 000 $3098.96 $598 098.96 $594 173.96
2 $594 173.96 $3094.66 $597 268.62 $593 343.62

a Show how the interest of $3098.96 for the 1st month was calculated.
b Add rows showing the progress of the loan for the next 3 months.
c Find the principal at the start of the 6th month.
d How much has Claire paid off the principal after 5 months?
e Calculate how much interest was paid in the first 5 months.

Solution

a Amount owing (principal) at the start of the 1st month = $595 000

0.0625
Interest for 1st month = $595 000 ×
12
= $3098.9583...
= $3098.96

ISBN 9780170413633 4. Loans and annuities 117

 b Month (n) Principal (P) Interest (I  ) Amount owing Balance
before repayment (P + I − R)
(P + I )
1 $595 000 $3098.96 $598 098.96 $594 173.96
2 $594 173.96 $3094.66 $597 268.62 $593 343.62
3 $593 343.62 $3090.33 $596 433.95 $592 508.95
4 $592 508.95 $3085.98 $595 594.93 $591 669.93
5 $591 669.93 $3081.61 $594 751.54 $590 826.54
Total $15 451.54

c Principal at start of 6th month is $590 826.54 Same as the balance at the end
of the 5th month

d Amount paid off principal after 5 months = $595 000 − $590 826.54

= $4173.46

e Interest paid in first 5 months = $15 451.54 Total of the Interest column

Exercise 4.01  Reducing balance loans

Example
1 From the table in Example 1 above, what was the amount that had been paid off the
1 principal at the end of the 4th month? Select A, B, C or D.
A $3085.98 B $592 508.95 C $3330.07 D $591 669.93

 2 a Add four rows to the table in Example 1 to show the progress of the loan for
months 6 to 9. (The 5th month details are shown to start you off.)

Month (n) Principal (P ) Interest (I  ) Amount owing before Balance
repayment (P + I  ) (P + I − R)
5 $591 669.93 $3081.61 $594 751.54 $590 826.54
6
7
8
9

b What is the principal at the start of the 9th month?

c What amount had been paid off the principal at the end of the 9th month?
d What total interest was charged for the first 9 months?

3 Stephanie borrows $1 370 000 to buy a house. Interest is charged at 5.6% per annum,
compounded monthly. How much does she owe at the end of the 1st month, after she
has made an $8495 repayment? Select A, B, C or D.
A $1 355 112 B $1 362 899 C $1 363 567 D $1 367 898

118 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 4 For a reducing balance loan of $780 000 at 6% p.a. over 12 years, with fortnightly
repayments of $3805.82, find:
a the total amount to repay
b the total interest payable.

5 Zoe borrowed $875 000 to purchase her first home. The bank lent her the money at
7.2% p.a. reducible interest and fortnightly repayments of $3444.65.

Fortnights (n) Principal (P ) Interest (I  ) Amount owing Balance

(P + I  ) (P + I − R)
1 $875 000 $2423.08 $877 423.08 $873 978.43
2 $873 978.43 $2420.25 $876 398.68 $872 954.03
3
4
5
6

a Copy and complete the table above showing the progress of Zoe’s loan for the first
6 fortnights.
b How much had she paid off the principal after six repayments?
c How much interest did she pay in the first 12 weeks?

6 Nick borrows $36 200 for his upcoming wedding, taking out a personal loan that has the
following conditions.
• Repayments can be made weekly, fortnightly or monthly.
• Extra repayments can be made at no extra cost.
• The loan approval fee is $230 (to be paid upfront when loan is established).
• The loan administration fee is $30 (charged after each 3 months of the loan).
• The interest rate is 13.6% p.a.
His monthly repayments (R) are $835 over 5 years.
a Calculate the monthly interest rate as a decimal, correct to 6 decimal places.
b The table below shows the progress of Nick’s loan. Use the exact monthly interest
rate to show that the interest paid in the 2nd month is $405.45.

Month P I P+I P+I−R

Do not use
1 $36 200 $410.27 $36 610.27 $35 775.27 rounded values for
2 $35 775.27 the interest rate in
your calculations.
3

c Copy and complete this table.

d After 3 months Nick is charged a fee. What is the fee and how much will it be?
e How much in interest charges will Nick have paid after 3 months?

ISBN 9780170413633 4. Loans and annuities 119

 7 Kim and Richard borrow $27 800 to finance an overseas holiday. They will repay their
loan over 5 years at a rate of 12.5% p.a., with fortnightly repayments of $313.
a Calculate the fortnightly interest rate as a decimal, correct to 5 decimal places.
b Copy and complete the table below for the first 2 fortnights’ repayments.

Fortnight P I P+I P+I−R

1
2

c How much will Kim and Richard pay in interest after 2 repayments have
been made?
d How much is still owing on the loan after 2 fortnights?

WS TECHNOLOGY
Homework
Reducing Reducing balance loans on a spreadsheet
balance loan:
spreadsheet
The spreadsheet shows the progress of a $400 000 loan at 4.8% p.a. reducible interest
and monthly repayment $2300. Enter the labels, values and formulas shown. Fill Down
for columns C, D and E until the amount owing in column E is negative, at row 304.
Reducible
loans

The details for the first 3 months and the final month of the loan are shown.

From the Insert menu, select Scatter with Lines and Markers to draw a line graph
showing the progress of the loan.

120 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 1 Adjust your spreadsheet to show these loan details. (Each change is based on the
original details as shown above.)
$600 000.00

$400 000.00

$200 000.00

$0.00
Amount owing

0 50 100 150 200 250 300

–$200 000.00

–$400 000.00

–$600 000.00

–$800 000.00

–$1 000 000.00

–$1 200 000.00

Number of payments

a The complete term of this loan is 23 years 0 months.

b The final repayment needed to reduce the balance to zero (and pay off the loan)
is $2747.95.
c If the monthly repayment is doubled to $4600, the loan will be repaid in 9 years
0 months.
2 a   Convert a monthly repayment of $2300 to a fortnightly repayment.
b Find the interest saved by making fortnightly repayments instead of monthly
repayments.
3 Use a spreadsheet (as demonstrated in this activity) to find:
a the term for a $500 000 home loan at 5.4% pa reducible interest and monthly
repayments of $3041
b the total interest on a travel loan of $40 000 at 8.49%pa reducible interest and
fortnightly repayments of $410
c the final payment on a home improvement loan of $350 000 at 5.49% p.a.
­reducible interest and monthly repayments of $2415.

ISBN 9780170413633 4. Loans and annuities 121

 WS
4.02  Credit cards
Homework
Using a credit card is like taking out a short-term loan. You use the card to purchase items
Credit card
statement and pay for them later when you receive a monthly statement. The interest charged can be
flat or compound and is charged daily on each item from the date of purchase.
WS
• Credit cards are more convenient than carrying cash, and are useful for purchasing items
Homework
Credit card
online, by phone or by post.
calculations
• A credit limit, such as $5000, is set by the card issuer, which is the maximum amount of
WS
money the cardholder is approved to spend using the credit card account.

Homework
• A monthly statement provides a record of spending.
Investigating
credit cards
• Many cards have an interest-free period of 55 days to repay the amount owing in full,
otherwise interest is calculated from the date of each purchase.
• The interest-free period does not apply to cash advances (withdrawals) made on the
card, which are charged a higher interest rate than purchases.
• Many offer reward schemes such as frequent flyer points, gift cards or cash-back
rewards.
• Credit cards with high credit limits can be both an advantage and a disadvantage.
• Balance transfer credit cards need to be considered carefully as they may contain
extra costs.

3141 5926 5358 9793

0000
MONTH/YEAR MONTH/YEAR
VALID
FROM 07/18 UNTIL
END 07/22
M WILLARD

NCMBANK

1123 5813 2134 5589

0000
MONTH/YEAR MONTH/YEAR
VALID
FROM 07/19 UNTIL
END 07/23
R YEN WISA

122 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 EXAMPLE 2

Mitchell’s credit card has a flat interest rate of 14% p.a. and no interest-free period.
He uses the card to make the following purchases for the period 1 August to 31 August:
2 August Phone recharge $85
16 August Jeans $129
29 August Movies $22
If Mitchell pays his account in full on 3 September, how much does he pay?

Solution

The interest for each purchase is calculated separately.

0.14
Daily interest rate = 1 year = 365 days
365

Purchase amount No. of days interest* Interest

0.14
$85 31 − 2 + 3 = 32 $85 × × 32 = $1.04328 …
365
0.14
$129 31 − 16 + 3 = 18 $129 × × 18 = $0.89063 …
365
0.14
$22 31 − 29 + 3 = 5 $22 × × 5 = $0.04219 …
365
Total = $236 Total = $1.9761… ≈ $1.98
* from date of purchase to 3 September

Do not round interest values

Total purchases = $236 until you calculate the total.

Total interest = $1.98

Total payment = $236 + $1.98 = $237.98

When calculating the number of days interest in the above example, we counted the number
of days from the date of purchase to the date of payment (3 September). However, some
credit card accounts also include the date of payment in the count, charging an extra day’s
interest, as seen in the next example.

ISBN 9780170413633 4. Loans and annuities 123

 EXAMPLE 3

Kylie’s credit card has an interest-free period of 55 days, with interest on purchases
compounded daily if the amount owing is not paid in full by the due date.
Note: For this card, interest is charged up to and including the date of payment.

Statement Period 14 December 2020 to 13 January 2021

Account No 2483 0222 1223 6517
Credit Limit $5000
Available Credit $3824.38

Ms Kylie Spender
16 Dollar Lane
Decimal Point 2178

Account Summary

Balance from previous statement $816.97

Payment and other credits $500.00CR
Purchases, cash advances $791.00
Interest and other charges $67.65
Closing Balance $1175.62
Minimum payment required $60.00
Due date 7 February 2021

Your Transaction Record

Date Reference Details Amount

15 Dec 2020 3146532 Payment-Thank you $500.00CR

15 Dec 2020 Interest $8.65
18 Dec 2020 4367549 ‘Fresh at the Bay’ Restaurant $85.60
21 Dec 2020 3020542 ATM Withdrawal $100.00
21 Dec 2020 3020542 ATM Fee $4.00
31 Dec 2020 5746380 Ballet tickets $265.50
2 Jan 2021 Annual Fee $55.00
7 Jan 2021 2345698 Fabulous Fashions $256.50
12 Jan 2021 6348921 Sam’s Hair and Beauty $83.40

Annual compound interest rate 22.484%

Daily compound interest rate 0.0616%

a Show how the closing balance of $1175.62 was calculated.

b What is the credit limit on this card?
c Calculate the following amounts for this period.
i   
cash advances    ii   
purchases    iii   interest and other charges
d How much was paid by Kylie since the previous statement and on what date?
e When does the interest-free period start and end?
f What interest will be charged if this account is paid in full on 6 February?

124 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 Solution

a Closing balance = $816.97 − $500 + $791 + $67.65

= $1175.62
b $5000

c   i Cash advances = $100 ATM withdrawals

  ii Purchases = $791 − $100 = $691
iii Interest and other charges = $67.65
d $500 on 15 December 2020

e From 14 December 2020 to 7 February 2021 The start of the statement

period until the due date
f As 6 February falls within the interest-free period, interest is only charged on the
cash advance, from 21 December to 6 February.
Number of days interest = (31 − 21 + 1) + 31 + 6 = 48   +1 to include the date of
purchase
Using the compound interest formula on P = 100, r = 0.000 616, n = 48
A = $100(1 + 0.000 616)48
= 103.0000 …
Interest = $103.0000 … − $100
= $3.0000 …
= $3.00

Exercise 4.02  Credit cards

1 Roberto is charged 0.04% compound interest per day on his credit card purchase of
$1200. Find the amount of interest owing after 30 days. Select A, B, C or D.
A $14.40 B $14.48 C $4.80 D $12.00

2 Karin has a credit card that charges simple interest of 22.5% p.a. and has no
interest‑free period. She bought shoes for $235 on 21 December and paid her account
on 29 December. Find the amount she paid. Select A, B, C or D.
A $235 B $287.88 C $236.45 D $1.45

3 Jad has a credit card with no interest-free period and a simple interest rate of 0.0453% Example

per day. The purchases below were made in October. If Jad pays his account in full on 2
1 November, how much does he pay?
4 October Swim trunks $110
18 October Swim goggles $25.00
25 October Wetsuit $649.99

ISBN 9780170413633 4. Loans and annuities 125

 4 NCM Bank credit cards have no interest-free period. For the credit card statement
below, find for the due date:
a the number of days interest charged on the football tickets
b the total amount due.

Ms Adele Atkins NCM BANK

Due date: 1 April Credit Card statement
Previous balance Payment Total purchases Interest
$876.15 $876.15 ............ ..........
Date Purchases Amount
15 March Coffee maker $865.95
20 March Football tickets $239.37
28 March Car tyres $952.00
Annual simple interest rate: 17.49%

Example
5 A credit card has an interest-free period of 55 days. One monthly statement is shown.
3 Interest is charged up to and including the date of payment.

Statement period: Account number 543210

1 June 2021 to 30 June 2021 Balance from previous statement $3256.43
Payment and other credits $3000.00
Mr C Evans Purchases $2195.48
1 Mountain Avenue Interest and other charges $3.84
Tournay 2126 Closing balance $2455.75
Annual compound interest rate Minimum payment required $212
18.25%
Daily compound interest rate Due date 25 July 2021
0.05%
Date Purchases Amount
15 June 2021 Payment − thank you $3000.00 CR
15 June 2021 Interest $3.84
18 June 2021 Bike repairs $1346.58
27 June 2021 Cycling outfit $665.50
27 June 2021 Bicycle helmet $185.60

a Show how the closing balance of $2455.75 was calculated.

b How much was paid by Mr Evans and on what date?
c When does the interest-free period start and end?
d What interest will be charged on the 3 purchases if this account is paid in full on:
i   20 July? ii   30 July?

126 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 6 This is the July statement for Claire’s credit card account.

STATEMENT

Ms C. Howe PRL BANK

Statement date: 28 August 2021 Credit limit: $5000

Previous balance Payments Purchases Interest

$305.60 $305.60 $886.50 ?

Date Purchases Amount Closing balance

Cengage Car
25 July $886.50 ?
Insurance
Annual percentage rate: 21% Daily percentage rate: 0.0575%

Note: Interest is charged on amounts from (and including) the purchase date up to
(and including) the statement date (shown at the top of the statement).
Minimum payment due: $50 or 5% of closing balance, whichever is larger.
What is the minimum payment due on this account?
A $16.43 B $40.83 C $45.22 D $50

7 Sarah bought a dining table and chairs for $2600 on 11 July using a credit card. Simple
interest was charged at a rate of 20.35% per annum for purchases on the credit card. No
other purchases were made on this credit card account. There was no interest-free period.
The period over which interest was charged included the purchase date and the payment
date. What amount was paid, when Sarah paid the account in full on 19 August?
A $2642.04 B $2643.49 C $2656.53 D $2657.98

8 Hassan has a credit card with these specifications.

• A flat rate of interest is charged at a rate of 20% p.a. on the daily balance from the
date of purchase up to and including the date of payment.
• There is no interest-free period.
Hassan’s credit card transactions for the month of August are shown below.

Date Description Debit ($) Credit ($) Balance ($)

03/08/2020 Opening balance 0
07/08/2020 Talk Net Inc 286 286
10/08/2020 Sleepy Head Beds 1835 2121
28/08/2020 Petrol station 76 2197
31/08/2020 Interest charges

On 31 August, Hassan paid this account in full, including the interest charges.
What amount did he pay?

ISBN 9780170413633 4. Loans and annuities 127

 INVESTIGATION

COMPARING CREDIT CARDS

The best credit card is the one that matches your spending and repayment habits. If you
plan to use the card for small or regular purchases and pay the total amount each month,
choose a card with an interest-free period and a low annual fee. If, however, you plan to
use the card to purchase many items and only pay off part of the debt each month, a low
interest rate is better.
The rates, fees and interest-free days of 5 credit cards are shown in the table.

Card Interest rate p.a. Interest Annual fee Interest-free

on purchases rate p.a. on days
cash advances
ANZ First Visa 12.49% 21.74% $58 55
Coles Low rate 12.99% 19.99% $49 62
MasterCard
NAB Low Rate Card 13.99% 21.74% $59 55
St George 13.24% 21.49% $0 (in first year) 55
Vertigo Visa $55 thereafter
Westpac Altitude 0 % (for first 20.74% $100 45
6 months)
20.24 % thereafter
Source: Canstar, July 2017

Select the best credit card for each person below, giving reasons for your choice.
a Cody uses his credit card frequently but always pays off the total amount due by the
due date.
b Erin likes to make a lot of purchases with her credit card, and only makes the
minimum payment each month.
c Mikhail often uses his credit card to make cash advances.

128 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

4.03 Annuities WS

An annuity is a financial plan involving regular equal contributions (payments) to Homework

Annuity grids
an account earning compound interest. Each contribution is made at the end of each
compounding period. Superannuation is an example of an annuity, in which part of your pay WS
is deposited regularly into a fund to provide future finance for your retirement years.
Homework
Annuity:
spreadsheet

EXAMPLE 4
WS
The table shows the progress of an annuity over 5 years with a contribution of $600 per
Homework
Annuities:
year made at the end of each year and an interest rate of 3% p.a. graphics
calculator

Year Balance at start Interest (I ) Contribution at Balance at end

of year (P ) end of year (a) of year (P + I + a)
1 $0 $0 $600 $600
2 $600 $18 $600 $1218
3 $1218 $36.54 $600 A
4 B C $600 $2510.18
5 $2510.18 $75.31 $600 $3185.49

a Find, to the nearest cent, the value of A, B and C, showing calculations.

b What is the balance at the end of the sixth year?
c If the contribution made at the end of each year, is doubled to $1200, what is the
balance at the end of the fourth year?

Solution

a Balance at end of 3rd year: A = $1218 + $36.54 + $600 = $1854.54

Balance at start of 4th year: B = $1854.54 (same as A)
Interest earned in 4th year: C = 0.03 × $1854.54 = $55.64
Check: Balance at end of 4th year = $1854.54 + $55.64 + $600 = $2510.18

b Balance at end of 6th year = $3185.49 + 0.03 × $3185.49 + $600 = $3881.05

c Balance at end of 4th year when contribution is $600 = $2510.18 (from table)
Balance at end of 4th year when contribution is $1200 = $2510.18 × 2 = $5020.36

ISBN 9780170413633 4. Loans and annuities 129

 Future value table
An annuity earns more interest and grows faster than simply investing a principal into an
account, because you keep making regular, equal payments into the account.
We know that future value means the final amount of an investment.
The future value of an annuity (FVA) is the total value of the investment at the end of the
term, after the final contribution is made. It is the sum of all contributions plus interest.
The table below gives the future value (in dollars) of an annuity with a contribution of $1 per
period. The values are rounded to 4 decimal places.

Future value interest factors

(Future value of an annuity with a contribution of $1 at the end of each period)
Period Interest rate per period
0.25% 0.50% 0.75% 1.00% 1.50% 2.00% 2.50% 3.00% 4.00% 5.00%
 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
 2 2.0025 2.0050 2.0075 2.0100 2.0150 2.0200 2.0250 2.0300 2.0400 2.0500
 3 3.0075 3.0150 3.0226 3.0301 3.0452 3.0604 3.0756 3.0909 3.1216 3.1525
 4 4.0150 4.0301 4.0452 4.0604 4.0909 4.1216 4.1525 4.1836 4.2465 4.3101
 5 5.0251 5.0503 5.0756 5.1010 5.1523 5.2040 5.2563 5.3091 5.4163 5.5256
 6 6.0376 6.0755 6.1136 6.1520 6.2296 6.3081 6.3877 6.4684 6.6330 6.8019
 7 7.0527 7.1059 7.1595 7.2135 7.3230 7.4343 7.5474 7.6625 7.8983 8.1420
 8 8.0704 8.1414 8.2132 8.2857 8.4328 8.5830 8.7361 8.8923 9.2142 9.5491
 9 9.0905 9.1821 9.2748 9.3685 9.5593 9.7546 9.9545 10.1591 10.5828 11.0266
10 10.1133 10.2280 10.3443 10.4622 10.7027 10.9497 11.2034 11.4639 12.0061 12.5779
11 11.1385 11.2792 11.4219 11.5668 11.8633 12.1687 12.4835 12.8078 13.4864 14.2068
12 12.1664 12.3356 12.5076 12.6825 13.0412 13.4121 13.7956 14.1920 15.0258 15.9171

EXAMPLE 5

Dominic opens an account that earns interest of 3% p.a. compounded monthly.

He contributes $100 at the end of each month for six months.
a Use the table on above to calculate the future value of Dominic’s annuity.
b How much interest will he earn on his investment?

Solution

a Interest rate per month = 3% ÷ 12 = 0.25%

No. of months = 6
Future value of $1 per month for 6 months = $6.0376 From table

130 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 Future value of $100 per month for 6 months = $6.0376 × 100
= $603.76

b Interest earned = $603.76 − 6 × $100 Future value − total

contributions
= $3.76

EXAMPLE 6
Future value
Find the contribution per period of an annuity that will give a future value of: tables

a $15 000 if the annuity earns 2.5% p.a. for 3 years

b $2600 if the annuity earns 10% p.a. compounded half-yearly for 4 years.

Solution

a FV = $15 000, Interest rate = 2.5% p.a., No. of periods = 3 years

Future value of $1 per year at 2.5% p.a. for 3 years = $3.0756 From table
Let $a be the contribution amount that will give a future value of $15 000.
Future value of $a per year at 2.5% p.a. for 3 years = $3.0756 × a = $15 000
So a = $15 000 ÷ $3.0756
= 4877.097…
≈ 4877.10 Round up for
contribution
The contribution will be $4877.10 per year.

b FV = $2600, Interest rate = 10% ÷ 2 = 5% (per half-year),

No. of periods = 4 × 2 = 8 half-years

As with the compound interest formula, the interest rate and number of
periods must be expressed with the same time units.

Future value of $a per half-year at 5% per half-year for From table

8 half-years = $9.5491 × a = $2600.
So a = $2600 ÷ $9.5491
= 272.276…
≈ 272.28
The contribution will be $272.28 per half-year.

ISBN 9780170413633 4. Loans and annuities 131

 Exercise 4.03  Annuities

Example
1 The table shows the progress of an annuity with a contribution of $5000 per year made
4 at the end of each year for 5 years.

Year Balance at start Interest Contribution Balance at end of year

of year (P) (I ) (a) (P + I + a)
1 $0 $0 $5 000 $5 000
2 $5 000 $400 $5 000 $10 400
3 $10 400 $832 $5 000 $16 232
4 $16 232 X $5 000 $22 530.56
5

a What is the annual interest rate?

b How much interest (X) was earned in the fourth year?
c Complete the table to find the amount of the annuity at the end of 5 years.

Example
2 Use the table to find the future value of an annuity (FVA) with a contribution of:
5 a $8000 per year for 5 years at 3% p.a.
b $600 per quarter for 9 months at 8% p.a. compounded quarterly
c $5400 per half-year for 5 years at 6% p.a. compounded half-yearly
d $900 per month for 10 months at 12% p.a. compounded monthly.

3 Cesar’s Truck Repairs has a plant replacement fund and deposits $5000 on 30 June and
31 December each year. If the account earns interest of 8% p.a. compounded half-yearly,
how much will be in the account at the end of 5 years?

4 Tom deposits $750 at the end of each month for 12 months into an account earning
6% p.a. compounded monthly. Immediately after making the last payment, he withdraws
all his money to buy a boat that costs $9300. Does he have enough in his account to buy
the boat? Show all working to justify your answer.

Example
5 Find the contribution per period (a) of an annuity whose future value (FV) is:
6 a $10 000, at 4% p.a. for 3 years
b $10 000, at 4% p.a. compounded quarterly for 3 years
c $26 500, at 5% p.a. compounded half-yearly for 6 years
d $9800, at 0.75% per month for 3 months.

6 Katarina would like to buy a house in 4.5 years and needs a deposit of $40 000.
What contribution should she make every 6 months into an account earning interest
of 6% p.a. compounded half-yearly to reach this amount?

7 Asher deposits an amount at the end of each year into a superannuation fund paying
8% p.a. compounded half-yearly. If he plans to have $400 000 after 6 years, what is his
regular deposit?

132 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 8 Carol and Bill start a trust fund for their granddaughter, Phoebe, on her 8th birthday to
finance her university education. What amount should they deposit each birthday in an
account earning 5% p.a. so that she will have $50 000 on her 18th birthday?

9 Selina invested $7600 at 8% p.a. compounded quarterly for three years.

a What is the final amount of her investment? Answer to the nearest dollar.
b Would she have achieved a better financial result if she had chosen an annuity of
$760 per quarter for three years at the same interest rate? Justify your answer.

10 The shop owners in a small shopping centre estimate that $50 000 will be needed
in 2 years’ time to repaint and retile the common areas. They plan to make regular
payments to a sinking fund earning 4% p.a. compounded quarterly.
a How much must be deposited in the sinking fund at the end of each quarter?
b How much interest will the sinking fund earn?
c How much would be in the sinking fund if they deposited $4000 per quarter for
2 years at the same interest rate?

11 Brianna is saving to go on holidays. She wants $6000 in 12 months so she can go on a

cruise. How much must she invest at the end of each quarter at 6% p.a. compounded
quarterly to achieve this?

12 The Downhams plan to buy a property in 3 years’ time and will need a deposit of
$60 000. If they deposit $4300 at the end of each quarter into an account earning 12%
p.a. compounded quarterly, will they have the deposit in 3 years’ time?

13 Azaa needs to save $16 000 for a holiday overseas in 3 years’ time.

FV
a Using the formula PV = , what single sum should Azaa pay into an annuity
(1 + r )n
now, investing at a compound interest rate of 1.5% p.a., compounded twice a year,
to ensure she can afford her holiday? Answer to the nearest dollar.
b If Azaa makes quarterly contributions of $1300 over 3 years in an account earning
3% p.a. compounded quarterly, use the future value table for an annuity on
page 130 to determine (to the nearest dollar) if Azaa has enough money to
take her overseas holiday. Justify your answer.

14 a Hadeya and Wyn invest $5000 every quarter for 3 years, invested at 8% p.a.
compounded quarterly. Using the future value table on page 130, what is the future
value of their annuity? Answer to the nearest cent.
FV
b Using the formula PV = , what single sum could Hadeya and Wyn invest for
(1 + r )n
4 years at 3% p.a. compounded quarterly, to reach the future value of the annuity
determined in part a?

ISBN 9780170413633 4. Loans and annuities 133

 15 Taj wants to save $500 000 to provide him with a regularly monthly pension in his
retirement.
a If Taj wants to retire in 5 years’ time, use the future value table for an annuity on
page 130 to determine (to the nearest dollar) the single sum he would need to invest
now, at an interest rate of 3% p.a., to ensure he can afford to retire comfortably.
b If Taj had contributed $9000 every quarter, invested in an annuity over 10 years, at
6% p.a., compounded quarterly, would he have been able to accrue the $500 000
required for his retirement? Use this future value table of interest factors for an
annuity in your calculations.

Period 1.5% 3% 4.5% 6%

5 5.152 5.309 5.471 5.637
10 10.703 11.464 12.288 13.181
20 23.124 26.870 31.311 36.786
40 54.268 75.401 107.030 154.762

INVESTIGATION

A FORMULA FOR FUTURE VALUE OF AN ANNUITY

The values in the future value table are calculated using a special formula for the future
value of an annuity:

 n 
FVA = a  (1 + r ) − 1 
 r 

where a = contribution per period, paid at the end of the period

r = interest rate per compounding period, expressed as a decimal
n = number of compounding periods.
This formula is NOT part of the Mathematics Standard 2 course and does not have
to be learned. Note that there are some similarities between this formula and the
compound interest formula.
1 Owen and Emily open an account earning interest of 5% p.a. They deposit $10 000
at the end of each year for 4 years.
a Use the future value table to show that the future value of their annuity is $43 101.
b Use the FVA formula to show that the future value of their annuity is $43 101.
c Show that they will earn $3101 in interest.
2 According to the future value table, the future value of an annuity with a contribution
of $1 per period, at an interest rate of 3% per period over 7 years, is $7.6625. Use the
FVA formula to show that this value is correct.

134 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 3 A sinking fund is an annuity where the future value has been decided and you pay
regular contributions into the fund to reach this target. For example, in an apartment
block, each unit owner pays into a sinking fund so money is available for maintenance
and repairs.
The owners of a block of units estimate that $30 000 will be needed in 4 years’ time to
repaint the building. They open a sinking fund with interest of 6% p.a. compounded
quarterly. Use the FVA formula to show that $1672.95 must be deposited each
quarter into the sinking fund to reach this target.

DID YOU KNOW?

Who wants to be a millionaire?

Did you know that if you open an account at age 20 and save
$100 per week at an interest rate of 10% p.a. compounded
weekly, you will be a millionaire just after your fiftieth birthday?
How long will it take you to become a millionaire if you start

iStock.com/pictafolio
saving $100 per week now at the current interest rate?

4.04  Loan repayment tables WS

Published loan repayment tables enable repayments for reducing balance loans to be easily Homework
Loan
calculated. repayments
table

EXAMPLE 7

This table gives the monthly repayments for a reducing balance loan of $1000 for various
terms and interest rates.

Monthly repayments per $1000 borrowed

Interest rate Term (years)
(% p.a.) 5 10 15 20 25 30
4.5 $18.64 $10.36 $7.65 $6.33 $5.56 $5.07
5.0 $18.87 $10.61 $7.91 $6.60 $5.85 $5.37
5.5 $19.10 $10.85 $8.17 $6.88 $6.14 $5.68
6.0 $19.33 $11.10 $8.44 $7.16 $6.44 $6.00
7.0 $19.80 $11.61 $8.99 $7.75 $7.07 $6.65
8.0 $20.28 $12.13 $9.56 $8.36 $7.72 $7.34

ISBN 9780170413633 4. Loans and annuities 135

 The Turners borrowed $570 000 at 5% p.a. reducible interest for a term of 20 years.
Use the table to find:
a their monthly repayment
b the total amount repaid
c the interest paid
d how much more interest they would pay if the loan was over 25 years instead of
20 years.

Solution

a Term = 20 years, interest rate = 5% p.a.

Monthly repayment for $1000 = $6.60 From table
Monthly repayment for $570 000 = $6.60 × 570
= $3762

b Total amount repaid = $3762 × 12 × 20 Monthly repayments over

20 years
= $ 902 880

c Interest = $902 880 − $570 000 Total amount repaid − principal

= $332 880

d Term = 25 years, interest rate = 5% p.a.

Monthly repayment for $1000 = $5.85
Monthly repayment for $570 000 = $5.85 × 570
= $3334.50
Total amount repaid = $3334.50 × 12 × 25 Monthly repayments over
25 years
= $1 000 350
Interest paid = $1 000 350 − $570 000 Total amount repaid − principal
= $430 350
Difference in interest paid = $430 350 − $332 880
= $97 470

136 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

Exercise 4.04  Loan repayment tables
Use the table from Example 7 on page 135 to answer Questions 1, 2 and 3.

1 Find the monthly repayment on a $450 000 loan at 6% p.a. for 15 years. Example

Select A, B, C or D. 7
A $4995 B $3798 C $4045.50 D $3222

2 Find the interest paid on a $500 000 loan at 5.5% p.a. over 25 years.
Select A, B, C or D.
A $421 000 B $377 500 C $921 000 D $532 000

3 For each reducing balance loan shown below, calculate:

i the monthly repayment
ii the total amount repaid
iii the total interest paid.
a $380 000 at 7% over 15 years b $925 000 at 4.5% over 25 years
c $1 230 000 at 5.5% over 20 years d $697 000 at 8% over 10 years.

4 This table gives the monthly loan repayments required to pay off various loans in
10 years.

Monthly loan repayments: 10-year term

Principal Interest rate
borrowed 4% p.a. 5% p.a. 6% p.a. 7% p.a.
$20 000 $202.49 $212.13 $222.04 $232.22
$50 000 $506.23 $530.33 $555.10 $580.54
$80 000 $809.96 $848.52 $888.16 $928.87
$100 000 $1012.45 $1060.66 $1110.21 $1161.08

For each loan with 10-year terms, calculate the amount of interest paid.
a $50 000 at 6% p.a. b $100 000 at 4% p.a.
c $20 000 at 5% p.a. d $80 000 at 7% p.a.

5 a If the interest rate from Question 4c dropped by 1%, how much less would the
monthly repayment be?
b How much more interest would you pay if the interest rate from Question 4b
increased by 2%?

ISBN 9780170413633 4. Loans and annuities 137

 6 The table below shows monthly repayments for loans over terms from 15 to 20 years.

Monthly loan repayments

Term of loan (years)
Principal
15 16 17 18 19 20
$50 000 $492.37 $477.25 $464.15 $452.73 $442.73 $433.92
$60 000 $590.85 $572.70 $556.98 $543.28 $531.27 $520.70
$70 000 $689.32 $668.15 $649.81 $633.83 $619.82 $607.48
$80 000 $787.80 $763.60 $742.64 $724.37 $708.36 $694.26
$90 000 $886.27 $859.05 $835.47 $814.92 $796.91 $781.05
$100 000 $984.74 $954.50 $928.30 $905.46 $885.45 $867.83

a How much would you repay per year on a loan of:

  i $60 000 for 19 years?
ii $80 000 for 17 years?
b Give two ways of finding the monthly repayment for a loan of $180 000 for
16 years.
c What is the interest saved by borrowing $300 000 over 15 years instead of 20 years?

7 The table shows the monthly and fortnightly repayments for some reducing balance
loans over different terms.

Repayment amounts
1 year 18 months 2 years
Loan amount monthly fortnightly monthly fortnightly monthly fortnightly
$10 000 $885 $408 $606 $280 $467 $215
$20 000 $1770 $815 $1213 $559 $935 $430
$30 000 $2655 $1223 $1819 $838 $1402 $646
$40 000 $3540 $1630 $1869 $1117 $2425 $861

a What is the total amount to repay if you have a loan of $30 000 over 2 years with
monthly repayments?
b How much interest do you save if you choose fortnightly repayments for the loan in
part a?
c Jaryd took a $40 000 loan over 1 year, while Maia took a $40 000 loan over 2 years.
If each made monthly repayments, what was the difference in the total amount
repaid?

138 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 INVESTIGATION

SUPERANNUATION PAYMENTS
With superannuation, you make regular contributions to an annuity during your
working life to provide funds for your retirement. When you retire, you can receive
your superannuation as a lump sum or reinvest it into another annuity that pays you in
regular instalments.
Suppose you want to retire at age 70. How much superannuation will you receive upon
retirement if your average annual income is $85 000? Find an online superannuation
calculator, enter 18 as your age, 9.5% as the employer contribution and $0 as your super
balance. Alter the ‘Super balance’ and ‘additional contributions’ to see the effect on the
expected super balance at retirement.
Hannah was born in 1971. She has a super balance of $150 000 and currently contributes
$50 per week to a superannuation fund. She intends retiring at age 67. Find her
estimated super balance at retirement.

4.05  Repaying a home loan

EXAMPLE 8

Tanya applied for a $545 000 home loan (a mortgage) to purchase a city apartment.
There are a number of additional costs associated with taking out the loan.
Registration of mortgage $140
Registration of transfer $272
Home loan establishment fee $600 This fee makes the interest
rate on Tanya’s loan stay
Rate lock (fixed interest rate) fee $750 the same, unlike a variable
interest rate where the rate
Lender mortgage insurance $7920 can change often.

Late payment charge $20 per late payment

Loan service fee $10 per month
a Tanya must also pay stamp duty (state government tax) of $20 015. If she is not
locking her interest rate, what is the total amount in charges she must pay upfront?
b Hence calculate, correct to one decimal place, Tanya’s upfront charges as a
percentage of her home loan.
c After paying the upfront charges, how much did Tanya pay in fees in the first year if
she did not make any late repayments?

ISBN 9780170413633 4. Loans and annuities 139

 Solution

a Upfront charges = $20 015 + $140 + $272 + $600 + 7920

= $28 947

$28 947
b × 100% = 5.3113...
$545 000
≈ 5.3%

c Loan service fee = $10 × 12

= $120

EXAMPLE 9

Jennifer takes out a personal loan to install a swimming pool costing $48 700 at her
house. She has 2 options:
Option 1: Fortnightly repayments of $741.11 at 10.99% p.a. reducible interest
Option 2: Monthly repayments of $1360.70, at 10.99% p.a. reducible interest
The 2 graphs below show the progress of the loan under each option.

Option 1: Fortnightly repayments

$60 000

$50 000
Amount owing

$40 000

$30 000

$20 000

$10 000

$0
0 10 20 30 40 50 60 70 80 90
Fortnights

140 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 Option 2: Monthly repayments
$60 000

$50 000

Amount owing
$40 000

$30 000

$20 000

$10 000

$0
0 5 10 15 20 25 30 35 40 45 50
Months

a Approximately how many years and months will it take Jennifer to repay the loan if
she makes her repayments:
i   fortnightly? ii   monthly?
b How much time would she save paying off the loan fortnightly instead of monthly?
c Calculate the total of Jennifer’s repayments if she pays them:
i   fortnightly ii   monthly.
d How much interest would she save paying off the loan fortnightly instead of
monthly?

Solution

a Reading from the graphs:

  i Approximately 78 fortnights = 78 × 2 weeks

= 156 weeks
= 156 ÷ 52 years
= 3 years

ii Approximately 44 months = 44 ÷ 12 years

= 3.6666… years
= 3 years + 0.6666… × 12 months
= 3 years 8 months

b Time saved paying fortnightly = 3 years 8 months − 3 years

= 8 months

ISBN 9780170413633 4. Loans and annuities 141

 c   i Total fortnightly repayments = $741.11 × 78
= $57 806.58
The difference in interest paid
ii Total monthly repayments = $1360.70 × 44 is the same as the difference
in total repayments.
= $59 870.80

d Interest saved paying fortnightly = $59 870.80 − $57 806.58

= $2064.22

Exercise 4.05  Repaying a home loan

Questions 1 to 3 refer to this table of NCM Bank loan interest rates and fees.

Home loan Car loan Personal loan

Interest rate: 5.20% p.a. Interest rate: 8.55% p.a. Interest rate: 12.99% p.a.
Registration of mortgage: $140 Loan establishment fee: $350 Loan approval fee: $150
Registration of transfer: $272 Early termination fee: $50 + Rate lock fee: $750
Loan establishment fee: $600 months remaining on loan Late payment charge: $20
× $680
Rate lock fee: total months of loan Loan service fee: $30 per
$750 (for loans ≤ $ 1 000 000) Late payment charge: $20 quarter
or
0.15% of the total loan amount
Late payment charge: $20
Loan service fee: $10 per month

142 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 1 Alia borrowed $9000 to buy a second-hand car. Example

a What interest rate was she charged? 8

b What does she pay to establish the loan?
c What will she be charged if she terminates the loan early?

2 Vaesna establishes a home loan of $500 000.

a What interest rate is he charged?
b What is the total amount in charges Vaesna must pay upfront?
c He made late home loan repayments 2 months in a row. How much did his late
payment and service charges amount to?

3 Elizabeth borrows $4700 to fill her new studio apartment with furniture and electrical goods.
a What interest rate is she charged?
b How much did she pay when her loan was approved?
c In the first year of her loan she made one late payment and had to pay
administration charges. How much did Elizabeth pay?

Shutterstock.com/Madhourse

ISBN 9780170413633 4. Loans and annuities 143

Example 4 This graph shows a home loan of $910 000 repaid with monthly repayments.
9 Monthly repayments
$1 000 000

$800 000
Amount owing
$600 000

$400 000

$200 000

$0
0 50 100 150 200 250 300
Months

a Estimate from the graph how many years and months it took to pay off this loan.
b Estimate how many years and months it took for the home loan to reduce to $600 000.
c How much money was still owing after 15 years?
d If the loan was repaid with monthly repayments of $6132, how much was repaid
in total?
e Calculate how much interest was paid.
f The graph below shows the same loan of $910 000 repaid with weekly repayments.
Estimate how many years and months it took to pay off this loan.

Weekly repayments on a $910 000 home loan

$1 000 000
$900 000
$800 000
$700 000
Loan amount

$600 000
$500 000
$400 000
$300 000
$200 000
$100 000
$0
0 100 200 300 400 500 600 700
Weeks

g Estimate how many years and months it took for the home loan to reduce to $700 000.
h How much of the loan was still owing after 5 years?
i If the loan was repaid with weekly repayments of $1533, how much was repaid
in total?
j Calculate how much interest was paid.
k How much time would be saved by paying off the loan weekly instead of monthly?
l How much interest would be saved by paying off the loan weekly instead of monthly?

144 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 5 The graph shows the progress of a $400 000 loan over a term of 20 years.

Repaying a $400 000 loan

$450 000
$400 000
$350 000
Principal owing

$300 000
$250 000
$200 000
$150 000
$100 000
$50 000
$0
0 50 100 150 200 250 300
Months

a Find, to the nearest $10 000, the principal owing after:

i   5 years ii   15 years.
b In what year was:
i   a principal of $300 000 owing? ii   the principal half-paid off?

6 The graph shows the progress of a $300 000 loan at 4.9% p.a. reducible interest over
15 years for monthly and fortnightly repayments.

Repaying a $300 000 loan

350000

300000

250000
Principal owing ($)

200000
Monthly repayments
150000

100000
Fortnightly repayments
50000

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years

a How much sooner can you repay the loan by making fortnightly repayments?
b After how many years was a principal of $100 000 owing if repayments were made:
i   monthly? ii   fortnightly?
c How much of the amount borrowed was still owing after:
i 5 years with fortnightly repayments?
ii 10 years with monthly repayments?

ISBN 9780170413633 4. Loans and annuities 145

 7 The blue graph below shows the progress of the Hayes family’s home loan, at monthly
repayments of $3295.
Repaying a loan with monthly repayments
700 000

600 000

500 000
Loan amount ($)

400 000

300 000

200 000

100 000

0
0
12
24
36
48
60
72
84
96
108
120
132
144
156
168
180
192
204
216
228
240
252
264
276
288
300
312
324
336
348
360
No. of repayments

a What amount did the Hayes family borrow?

b How much will they owe after 120 months?
c How many years will it take to pay off the loan?
d In total, how much will they repay?
e Calculate how much interest they will pay.
f After 15 years (180 months) into the loan, the family made an extra payment of
$10 000 off the loan. It changed the length of the loan, as shown by the orange
graph and the ‘dip’ at 180 months. How many years and months will it take to pay
off the loan now?
g How much will the Hayes family repay now, including the $10 000?
h How much interest will they pay now?
i How much time was saved on the loan after paying the extra $10 000?
j How much interest was saved on the loan after paying the extra $10 000?

146 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 INVESTIGATION

CHANGING VARIABLES ON HOME LOANS

Use the Internet to find an online loan calculator to see the effect of:
• higher or lower interest rates on total interest paid
• repaying fortnightly or weekly rather than monthly
• changing the term of the loan on the size of the repayments
• increasing the size of the repayment on the time for the loan to be repaid.

My Home Loan Graph Yearly Breakdown

Loan Amount Principal Owing

$300,000
$600k
Loan Period
25 year/s
$500k
Loan Type
Variable Fixed
$400k
Interest Rate
6.25 % p.a.
$300k
Repayment Frequency
Monthly Fortnightly Weekly
$200k
Repayment Type
Principal & interest Interest Only
$100k

0
0 8 16 25

Years

Ongoing
Monthly Total Interest Payable
$1,979.01
Repayments $293,702.00

Reproduced with permission from St George Bank

The graph above shows the progress of a reducing balance loan over time, with total amount
owing (principal + interest) shown in orange and the amount of principal owing shown in blue.
Suppose you borrowed $300 000 to buy an apartment at 6.25% p.a. reducible interest to
be repaid monthly over 25 years. Use your loan calculator to answer these questions.
a What is the size of each monthly repayment?
b How does increasing the monthly payment by $50 affect the term of the loan?
c How much sooner would you repay the loan if you made repayments fortnightly
instead of monthly?
d How much sooner would you repay the loan if you made an extra payment of $10 000
after 10 years?
e What amount did you pay in stamp duty? (Use a stamp duty calculator.)

ISBN 9780170413633 4. Loans and annuities 147

 SAMPLE HSC PROBLEM

This table is used to calculate monthly loan repayments on reducing balance loans at a
lending institution.

Monthly repayments per $1000 borrowed

Interest rate Term (years)
(% p.a.) 5 10 15 20 25
5.0 $18.87 $10.61 $7.91 $6.60 $5.85
5.5 $19.10 $10.85 $8.17 $6.88 $6.14
6.0 $19.33 $11.10 $8.44 $7.16 $6.44
6.5 $19.57 $11.35 $8.71 $7.46 $6.75

James borrowed $820 000 at 5.5% p.a. for 20 years.

a What is his monthly loan repayment?
b What total amount does he repay?
c How much interest does he pay?
d If James paid off this loan over 25 years at the same interest rate, how much more
would he pay in interest?

148 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 Study tip
Finding the key of a topic and using mnemonics
When studying a novel in English class, you look for the underlying theme of the book.
When studying a mathematics topic, you can also look for ‘the key’, the main idea that
threads through the topic, the reason for learning it. Once you understand and appreciate
the point of a topic, a lot of its concepts and ideas will fall into place.
Analyse the content of each topic/chapter for meaning and relevance. What is the
key idea or theme? How and where will you use the mathematics? Use each chapter’s
introductory outline and review pages to help you. Ask yourself and your teacher questions
about the topic. Have an opinion. Sound informed.
A mnemonic (pronounced ‘ne-monic’ with a silent first m) is a memory aid—a saying,
rhyme or picture to help you remember a rule or list of ideas. You probably already know
some mnemonics for spelling (‘i before e except after c’) and the number of days in each
month (‘Thirty days has September ...’).
To memorise a complex list or rule, make up a saying or picture that is easy to remember.
For example, the initials for the definitions of basic trigonometry SOH CAH TOA can be
remembered using the saying ‘Some Old Hens Can Always Hide Their Old Age’ or ‘Sun
rise
Over Head Caused A Huge Tan On Arms’. The gradient formula m = can be learned
run
by picturing yourself at sunrise waking up to go for a run.
Be creative in your use of mnemonics. In fact, the sillier the phrase or picture, the better the
mnemonic because absurd words and images are easier to recall.

ISBN 9780170413633 4. Loans and annuities 149

 4. CHAPTER SUMMARY

This chapter, Loans and annuities, examined the financial mathematics of credit, loans and
annuities. You should be able to calculate the interest and repayments involved in flat-rate
loans, payments, reducing balance loans and credit cards, and use tables and graphs to
track the progress of a reducing balance loan. You used tables to calculate future values of
annuities, and loan repayments. You should understand the financial terminology of this
topic, and be able to make informed decisions on different loan and investment options.
Make a summary of this topic. Use the outline at the start of this chapter as a guide.
An incomplete mind map has been printed below. Use your own words, symbols, diagrams,
boxes and reminders. Gain a ‘whole picture’ view of the topic and identify any weak areas.

Credit cards

Reducing
Annuities
balance loans

Loans and
annuities

Repaying a Loan repayment

home loan tables

150 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 4. TEST YOURSELF

1 Thomas borrowed $18 000 for a new bathroom at 9% p.a. reducible interest. He made Exercise

monthly payments of $420. 4.01

a Draw up a table showing the progress of the loan in the first 4 months, with
columns as shown below, where R = $420.

Month P I P+I P+I−R

1 $18 000
2
3
4

b How much had Thomas paid off the principal after his fourth payment?
c How much interest did he pay in the first four months?
d Calculate the total of the repayments made in the first four months.

2 Beatrice owns a credit card that has no annual fees and charges a flat rate of 19.65% p.a. Exercise

interest on all purchases made. If interest is charged from the day of purchase, what is 4.02
the interest charged on $2135 for 21 days? Select A, B, C or D.
A $419.53 B $412.65 C $24.14 D $19.98

3 Minjee has a credit card with no interest-free period. Her monthly statement for Exercise

October is shown. 4.02

Ms Minjee Lee GOLF BANK

Payment due: 1 November 2021 Credit Card statement
Previous balance Payment Total purchases Interest
$1325.68 $1325.68 ............ ..........
Date Purchases Amount
15 October Golf coaching $325.50
20 October Golf shoes $295.00
28 October Massage $137.00
Annual simple interest rate: 19.78%
Daily percentage rate: 0.0542%

If Minjee pays her account in full on 5 November, how much interest does she pay?

ISBN 9780170413633 4. Loans and annuities 151

 Use the future value of an annuity (FVA) table on page 130 to answer Questions 4 and 5.

Exercise 4 Tahlia puts $5000 in an account at the start of each year for 10 years.
4.03 a What is the future value of her annuity if the interest rate is 2.5% p.a?
b How much interest will she earn?

Exercise
5 Irven contributes $16 000 per quarter for one year into an annuity that earns interest at
4.03 3% p.a. compounded quarterly. Calculate the future value of Irven’s annuity.

Exercise
6 This table gives the monthly repayments of a car loan for different loan amounts
4.04 and terms.

Monthly car loan repayments

Loan Term of loan (months)

amount 12 24 36 48
$10 000 $870 $453 $314 $244
$12 000 $1043 $542 $375 $292
$14 000 $1216 $632 $437 $340
$16 000 $1390 $721 $498 $388
$18 000 $1562 $811 $561 $436
$20 000 $1735 $901 $622 $484

a Consider a car loan of $16 000 over 3 years. Use the table to calculate:
 i the monthly repayment
  ii the total amount repaid
iii the total interest paid.
b If the $16 000 car loan in part a is paid off over 24 months instead, how much
money would be saved?

152 NCM 12.  Mathematics Standard 2 ISBN 9780170413633

 7 The graph below shows the progress of Ante’s home loan, in which he made monthly Exercise

repayments of $3000. 4.05

Reducing balance loan monthly repayments

$400 000

$350 000

$300 000
Amount owing ($)

$250 000

$200 000

$150 000

$100 000

$50 000

0
0 24 48 72 96 120 144 168 192 216 240 264
Months

a How much money did Ante borrow?

b What was the amount owing after 10 years?
c How many years and months did it take Ante to pay off the loan? Qz

d What was the time taken for the loan to be half-paid? Chapter quiz

ISBN 9780170413633 4. Loans and annuities 153