GRADE 11

FINANCIAL MATHEMATICS

SIMPLE INTEREST / APPRECIATION

FLAT RATE / STRAIGHT LINE / LINEAR DEPRECIATION

Simple interest means the interest is calculated on the initial amount regardless of the number of years
over which the calculation is made.

Depreciation is when the value of an item reduces in value over time e.g. the value of a motor vehicle.
When based on the original value regardless of the number of years it is called flat rate depreciation or
straight-line depreciation or linear depreciation. The formula is the same as the Simple Interest
formula but with a – sign.

Terminology:
Book value is the value of an asset e.g. a car which is based on the original value less any
depreciation.
Scrap value is the value of an asset after it has come to the end of its useful life.
pa stands for per annum/year

A = P(1  𝑖𝑛) A = final amount received / final value

P = initial amount invested / initial value / principle
𝑛 = number of years over which the calculation is made
𝑖 = interest rate as a decimal e.g. if the interest rate is 12% pa then
𝑖 = 0,12

Simple Interest = A − P

NB Hire purchase is always calculated using simple interest

Example 1
Calculate the amount at the end of 5 years if R1 200 is invested at 8% pa simple interest.

A = 1200(1 + 5(0,08))
A = R1680

Example 2
A computer was bought for R5300 and after 3 years the value is R2630. Calculate the flat rate
depreciation, correct to 1 decimal digit.

2630 = 5300(1 − 3𝑖)

0,496.. = 1 − 3𝑖
-0,5… = -3𝑖
𝑖 = 0,1679.. NB i is always a positive number
rate of depreciation = 16,8% pa NB note setting out. i is not the rate.

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Gr 11 Financial Mathematics

COMPOUND INCREASE / APPRECIATION

COMPOUND DECREASE / REDUCING BALANCE DEPRECIATION

With compound interest the interest is added/subtracted each year, month, etc so each calculation is
made based on a new initial amount, P. Depreciation using the compound formula is known as
reducing balance depreciation. Again, the only change in the formula is it now has a minus sign.

NB This formula is used for inflation and population.

A = P(1  𝑖)n
A = final amount received / final value / future value
P = initial amount / present value also called the capital or principle
𝑛 = number of payments made over the time period the money is invested/borrowed
𝑖 = interest rate per payment as a decimal e.g. if the interest rate is 12% then 𝑖 = 0,12

Compound Interest = A − P

Interest can be calculated daily / monthly / quarterly / half yearly.

If the interest is calculated daily, monthly, quarterly, etc. then the i and n will change.
e.g. if the interest rate is 12% pa compounded monthly, i.e. interest is paid monthly, then you will
12%
receive = 1% per month and you will receive 12 payments in a year and
12
12%
if the interest rate is 12% pa compounded quarterly then you will receive = 3% per quarter and
4
you will receive 4 payments in a year

The 𝑖 will be divided by the number of payments made in 1 year and the n multiplied by the same
number i.e.
• 365 for daily (unless a leap year),
• 12 for monthly,
• 4 for quarterly and
• 2 for semi-annually/bi-annually/ half yearly.

Example 3
Calculate the amount at the end of 5 years if R1 200 is invested at 8% compounded monthly.
P = 1 200
0,08 5×12
A = 1200 (1 + ) n = 5 x 12 = 60
12
8 0,08
A = R1787,81 i = 100 ÷ 𝟏𝟐 = 12

Example 4
How much must I invest at 10% pa compounded quarterly if I want at least R10 000 in 3 years’ time?
A = 10 000
0,1 3×4
10000 = P (1 + 4
) n = 3 x 4 = 12
10000 10 0,1
=P i = 100 ÷ 𝟒 =
1,344… 4
P = R7435,56

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Gr 11 Financial Mathematics

Example 5
If I invest R5000, what interest rate, compounded 6-monthly, will give R8000 after 5 years? Give the
answer correct to 1 decimal digit.

𝑖
8000 = 5000(1 +2)5x2 A = 8000
𝑖
1,6 = (1 +2)10 P = 5000
10 𝑖
√1,6 = 1 + 2 n = 5 x 2 = 10
𝑖
1,048… = 1 + 2
𝑖
0,048 = 2
𝑖 = 0,096…
Interest rate = 9,6%

Example 6
For how long must I invest R75 000 at 10% pa compounded annually if I want a minimum of
R100 000?
A = 100 000
n
100000 = 75000(1 + 0,1) P = 75 000
10
1,333… = 1,1 n
i = 100 = 0,1
1,12 = 1,21 NB use trial & error to find the answer.
1,13 = 1,331 In Gr 12 you will learn how to solve.
1,14 = 1,4641

𝑛 = 4 years 1,331 is less than 1,3333… Interest is compounded annually so will not
have enough at the end of 3rd year  need to invest for 4 years.

Example 7
A new motor vehicle has a value of R280 000 and the value depreciates at 4,1% pa on a reducing
balance. What is its trade-in value after 6 years?
P = 280 000
6
A = 280000(1 − 0,041) n=6
4,1
A = R217 805,92 i = 100 = 0,041

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Gr 11 Financial Mathematics

NOMINAL AND EFFECTIVE INTEREST RATE

Calculate the interest if you invest R100 for a year at 12% pa compounded annually and
12% pa compounded monthly.

ANNUAL COMPOUNDED MONTHLY

0,12 1×12
A = 100(1 + 0,12)1 A = 100 (1 + )
12
A = R112 A = R112,68

Interest = R112 – R100 Interest = R112,68 – R100

Interest = R12 Interest = R12,68

Because the second example is compounded monthly you receive “interest on interest” and so slightly
more interest. When an interest rate is quoted by a bank it is stated as 12% per annum this is called
the NOMINAL INTEREST RATE. But if the interest rate is compounded more than once a year,
e.g. monthly, you will “in effect” get slightly more than 12%. The actual rate is called the
EFFECTIVE INTEREST RATE.

𝑖𝑛𝑜𝑚 𝑛
The formula used is 𝑖𝑒𝑓𝑓 = (1 + ) −1
𝑛
where 𝑖𝑒𝑓𝑓 is the effective interest rate
𝑖𝑛𝑜𝑚 is the nominal interest rate
n is the number of payments in 1 year. NB the effective interest rate is always
calculated on 1 year.
NB this formula is not given on the Information Sheet, so you need to learn it.

Example 8
Jane invests R150000 at 12% pa compounded daily. Calculate the effective interest rate, correct to
2 decimal digits.

𝑖𝑛𝑜𝑚 𝑛
𝑖𝑒𝑓𝑓 = (1 + ) −1
𝑛
0,12 365
𝑖𝑒𝑓𝑓 = (1 + 365 ) −1
𝑖𝑒𝑓𝑓 = 1,12747 − 1
𝑖𝑒𝑓𝑓 = 0,12747

Effective interest rate = 12,75%

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 Gr 11 Financial Mathematics

TIMELINES

Timelines are used when the there are changes in the interest rate and/or deposits or withdrawals are
made during the time period.

Example 9
Jasmin invests R50 000 in a savings account. For the first 3 years the interest rate is calculated at
6,5% pa compounded quarterly, then it changes to 4,25% pa compounded monthly for the rest of the
1
investment period. 42 years after her initial deposit Jasmin invests a further R10 000 into the account.
Calculate the value of the investment at the end of 6 years.

6,5% 4,25%
4 12

+R50 000 +R10 000 ?

T0 T1 T2 T3 T4 T5 T6

There are two to ways to calculate the answer:

• Calculate each step or
• Treat the two amounts as separate investments and combine at the end.

Option 1
From the timeline you can see there are three periods to be considered:
• T0 to T3
• T3 to T4,5
• T4,5 to T6

• 3 years invested at 6,5% pa compounded quarterly

0,065 3×4
A = 50000 (1 + )
4
A = R60670,37895 NB do not round off till the end
1
• 12 years invested at 4,25% pa compounded monthly
0,0425 1,5×12
A = 60670,37895 (1 + )
12
A = R64 656,77943
1
• Deposit R10 000 and invest for 12 years at 4,25% pa compounded monthly
P = R64 656,77943 + R10 000
P = R74 656,77943

0,0425 18
A = 74656,77943 (1 + )
12
A = R79562,17

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Gr 11 Financial Mathematics

Option 2
• R50 000 invested for 3 years at 6,5% pa compounded quarterly and then invested for 3 years at
4,25% pa compounded monthly
0,065 3×4 0,0425 3×12
A = 50000 (1 + ) (1 + )
4 12
A = R68 905,10984
1
• R10 000 invested for 12 years at 4,25% pa compounded monthly
0,0425 18
A = 10000 (1 + 12
)
A = R10 657,05877
• Combine both answers
A = R68 905,1098 + R10 657,05877
A = R79 562,17

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