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F3ReadingToLearn - Percentages 2

1) The document discusses different methods of calculating average returns on investments over multiple years, and determining which method most accurately reflects the actual performance. 2) It also examines the calculations involved in monthly mortgage repayments, showing the breakdown of interest paid and principal repaid each month at a 3% annual interest rate compounded monthly. 3) Readers are tasked with practicing these mortgage calculations and determining the effective annual percentage rate for loans quoted at a flat monthly rate.

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27 views4 pages

F3ReadingToLearn - Percentages 2

1) The document discusses different methods of calculating average returns on investments over multiple years, and determining which method most accurately reflects the actual performance. 2) It also examines the calculations involved in monthly mortgage repayments, showing the breakdown of interest paid and principal repaid each month at a 3% annual interest rate compounded monthly. 3) Readers are tasked with practicing these mortgage calculations and determining the effective annual percentage rate for loans quoted at a flat monthly rate.

Uploaded by

gordonkhlaw
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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St.

Paul's College
Reading to Learn – Form 3 Mathematics

A. Average interest rate

On 1/1/2020, Chris invested 1000 dollars in fund A. The return for fund A was 20% in the year 2020
and so he had 1200 dollars on 31/12/2020. Chris kept all 1200 dollars invested in Fund A for the year
2021. However, the return for 2021 was affected by a pandemic and resulted in a loss of 2.8%. What
is the average return for the two years?

Agent A calculated the average return as


( +20% ) + ( −2.8% ) = 17.2%
2

Paul, a friend of Chris, calculated the average return as follows.

The amount Chris had at the end of 2021


= 1200 (1 − 2.8%)
= 1166.4 dollars

Let r% p.a. be the average return (compounded annually).


1000 (1 + r % ) = 1166.4
2

(1 + r % ) = 1.1664
2

1 + r % = 1.1664
r =8

The average return is 8% p.a.

Task 1 Which average return reflects the actual performance of the fund in this two
years’ period?

Task 2 The average return 8% p.a. is the geometric mean of the two returns +20%
and –2.8% .

Find the geometric mean of the two returns –4% and +50% .

The return calculated by Paul is the annualised percentage rate (APR) requested by the Hong Kong
Monetary Authority to be shown on all the documents for the personal loan products offered.
B. Mortgage Calculation - Annualised percentage rate

A mortgage of 1 million dollars was borrowed by Bill on 1/1/2020 at an interest rate of 3% p.a. (APR)
compounded monthly. The loan is to be repaid within 20 years by monthly instalments of $5,546
payable at the end of each month. The last instalment will be the total amount outstanding at that
time, which will be less than $5,546. The detailed calculations are included in the Excel file
F3ReadingToLearn_Percentages_Mortgage.xlsx

The table below shows the data for the first four months, the amount of loan outstanding at the
beginning of each month and the instalment paid at the end of the month, which is broken down into
two items, the interest paid and the amount of loan repaid.

Beginning of Month End of Month


Month
Loan Outstanding Interest paid Loan repaid Instalment
1 1,000,000.00 2,500.00 3,046.00 5,546.00
2 996,954.00 2,492.39 3,053.61 5,546.00
3 993,900.39 2,484.75 3,061.25 5,546.00
4 990,839.14 2,477.10 3,068.90 5,546.00

The formulae for the calculation of the interest rate and the data for the first 3 months are shown
below.

Effective interest rate per month


= 3% 12
= 0.25%

For month 1

Loan outstanding at the beginning of month 1


= Amount borrowed
= 1,000,000.00

Interest paid at the end of month 1


= 1, 000, 000.00  0.25%
= 2,500.00

Loan repaid at the end of month 1


= Instalment – Interest paid
= 5,546.00 – 2,500.00
= 3,046.00
For month 2

Loan outstanding at the beginning of month 2


= “Loan outstanding at the beginning of month 1” – “Loan repaid at the end of month 1”
= 1,000,000.00 – 3,046.00
= 996,954.00

Interest paid at the end of month 2


= 996,954.00  0.25%
= 2,492.39

Loan repaid at the end of month 2


= Instalment – Interest paid
= 5,546.00 – 2,492.39
= 3,053.61

For month 3

Loan outstanding at the beginning of month 3


= “Loan outstanding at the beginning of month 2” – “Loan repaid at the end of month 2”
= 996,954.00 – 3,053.61
= 993,900.39

Interest paid at the end of month 3


= 993,900.39  0.25%
= 2,484.75

Loan repaid at the end of month 3


= Instalment – Interest paid
= 5,546.00 – 2,484.75
= 3,061.25

Task 3 Follow the calculations above to work out the calculations for month 4.

C. Flat Rate versus Annualised percentage rate

A mortgage of $200,000 was borrowed by David on 1/1/2022 at a flat rate (quoted by the financial
institution) of 0.25% per month. The loan was to be repaid within 10 months by monthly instalments
of $20,500 payable at the end of each month. The last instalment will be the total amount outstanding
at that time, which will be a little less than $20,500 .
By a flat rate of 0.25% per month, the instalment is calculated as follows.

Loan repayment
= 200, 000  10
= 20,000

Interest payment
= 200, 000  0.25%
= 500

Instalment
= 20,000 + 500
= 20,500

In fact, from the mortgage calculations in section B, we see that the amount of loan outstanding is
reducing and so should be the interest payments. Thus, it is certain that the annualized percentage
rate is definitely not 3% ( 0.25% 12 ) p.a and should be higher.

Task 4 Using the Excel file F3ReadingToLearn_Percentages_Mortgage.xlsx


provided, with some modification, and by trial and error, find the APR
for the mortgage (correct to 0.1%) and the amount of the last instalment.

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