COLLEGE OF BUSINESS EDUCATION (CBE)
MWANMZA CAMPUS
BUSINESS MATHEMATICS AND STATISTICS NOTES-2024
MODULE CODE: MTT06101
MODULE INSTRUCTOR: MADELEKE J DEOGRATIAS
LECTURE 01
COMPOUND INTEREST AND ORDINARY ANNUITY
Compound Interest
Is interest calculated on the initial principal, which also includes all of the accumulated interest from
previous periods. With compound interest, interest is paid on the original principal amount plus
accrued interest, hence interest earns interest. Below is the formula for compound interest;
r nt
A = P(1 + ) ,
n
Where;
A is amount/ future value
P is the principal
r is the annual interest rate as a decimal
n is the number of compounding periods per year
t is the time in years.
Example 01
Rosy deposited Tshs 100,000 for five years in the bank. Bank provides 5% compound interest.
Interest is deposited by bank every month. What amount will she receive at the end of the maturity
period
Example 02;
If you deposit $4000 into an account paying 6% annual interest compounded quarterly, how much
money will be in the account after 5 years?
Example 03;
How much money would you need to deposit today at 9% annual interest compounded monthly to
have $12000 in the account after 6 years?
Example 04;
At 3% annual interest compounded monthly, how long will it take to double your money?
Ordinary Annuity
Annuity is a string of fixed payments at equal intervals over a fixed time period. Examples of annuity
are; regular deposits to a saving account, monthly insurance payments, pension payments e.t.c.
Ordinary Annuity is an annuity in which payments are made at the end of the period. Example
interest paid on bonds. This is also called immediate annuity.
The time period can be annual, semi-annual, quarterly or monthly depending on the arrangement.
The payments could either be required to be made to or received from some one.
In dealing with annuity Formulas we shall use the following symbols
1
R : The periodic payment of the annuity
n : Number of payments made
i : Interest rate per payment interval
S : Future value (accumulated value) of the annuity
A : The present value of annuity or discount value
Future value (accumulated value) of the annuity (S).
Is the amount of money you will have at the end of the annuity’s term.
Formula for future value (accumulated value) of ordinary annuity is given by;
S = R × accumulation factor ……………..(i)
But
( 1+ i )n −1
Accumulation factor =
i
n
(1+i) −1
Formula (i) above become; S = R( ¿
i
Total Interest Earned (I) = S - nR
NOTE:
i = annual interest rate (express as a decimal) divide by a number of payments per year; e.g
for a monthly annuity of 6%, interest rate i = 0.06/12 = 0.005
Also accumulation factor can be obtained directly from Accumulation Factor for Simple
Annuities Table
Example 01
Mr. Beckem receives Tshs 10,000 per annum and propose to invest the same @ 10% at the end of
each period , for a period of five years. Calculate the payment he will receive at the end of the
period.
Example 02
Suppose you decide to save $75/month for the next three years. If you invest all of these savings in
an account which will pay you 7% p.a compounded monthly, determine:
a. the total in the account after 3 years
b. the amount you deposited
c. the amount of interest earned
Example 03
Compute the accumulated value of an ordinary annuity of $500 which is compounded quarterly for
one year at an annual rate of 8%.
Example 04
Say you intend to deposit $200.00 at the end of every 6 months into a bank account that pays 4%
annual interest compounded semiannually. How much will you have saved after 20 years?
Example 05
Suppose you deposit $900 per month into an account that pays 4.8% interest, compounded
monthly. How much money will you have after 9 months?
Sinking Funds
Sinking fund is a fund that is created through periodic fixed payments that accumulates at
compounding interest to provide funds at the end of the period for a certain purposes.
2
The total amount of money in the fund is simply the accumulated value S of an annuity. Thus the
periodic payment R can be computed from formula;
S = R × accumulation factor
S iS
R= R= n
accumulation factor (1+i) −1
Example 06
The owners of a tool and die company wants to accumulate $50,000 to replace worn-out equipment
8 years from now. How much should they contribute each month into a sinking fund which pays 8%
compounded quarterly?.
Example 07
Brbara wants to save up enough money to put a $24,000 down payment on a house in 2 years. How
much money should she deposit each month into an account which pays 6% interest compounded
monthly in order to save enough money for the down payment?
Sinking Fund Schedule.
Is a table that shows the sinking fund contribution, interest earned and the accumulated balance for
every payment in the annuity.
In construction of sinking fund schedule, first calculate periodic payment (R)
Lay out of sinking fund schedule.
Period Initial Amount Payment (R) Interest (I) Increase in Final amount
fund (I+R)
All calculations were rounded to the nearest two decimal place. The final amount is slightly different
than the amount predicted mathematically due to rounding.
Example 08
Construct a sinking fund schedule which describes the accumulation of a sinking fund in which
$10,000 is to be accumulated in 3 years if payments are made quarterly into an account which pays
5% compounded quarterly.
The present value of the annuity (Discount value) (A).
Is the amount of money which must be set aside today to allow a specified payment for a
predetermined period of time.
The present value indicates, for example, how much money should be invested in order to provide a
fixed monthly stipend for retirement for the next 20 years.
The present value of an ordinary annuity (A) is computed by the formula;
A = R × discount factor……………………..(i)
But
n
(1+i) −1
Discount factor =
i(1+i)n
Formula (i) above becomes;
n
(1+i) −1
A = R( )
i(1+i)n
Also discount factor can obtained from discount factors for simple annuity table.
Example 01
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Bill would like to invest some money so that he can receive a monthly retirement supplement. How
much money must he invest at 9% compounded monthly in order to receive $500 at the end of each
month for the next 5 years?
Example 02
Calculate the present value of ordinary annuity of Tshs 10,000 @ 10% for a period of 5 years.
Example 03
Mr. Smith would like to receive $400 each quarter for 10 years after he retires. How much money
does he have in a money market fund which pays at the rate of 8% compounded quarterly?
Amortization
Is the process of reducing or paying off a debt with regular payments.
A loan is amortized if both the principal and interest are paid off with a single periodic payment
whose amount is fixed for the life of the loan. Example of amortized loan is a home mortgage which
is typically paid off in monthly installments lasting from 15 to 30 years.
To compute the monthly payment, we can think of an amortized loan as a simple annuity whose
present value A is the amount of money borrowed. The payment(R) can be computed from the
formula;
A = R × discount factor
A
R=
discount factor
n
(1+i) −1
But discount factor =
i(1+i)n
n
Ai (1+i)
R=
(1+i)n−1
Instead of calculating, the monthly payments using the discount factor tables can be used to
compute monthly payments.
Example 04
Compute the monthly payment on $10,000 loan at a 6% annual interest rate which is amortized over
15 years.
Example 05
Anthony wants to buy a boat which costs $17,000. He has saved $5000, which he will use as a
deposit, and he will finance the rest of it by taking out a loan to be paid back in equal monthly
installments amortized over 5 years at an annual interest rate of 12%. What will his payment be?
Example 06
Compute the monthly payment on a $15,000 loan at a rate of 8.5% to be paid back monthly over a
period of 5 years, use tables.
Amortization Schedule.
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An amortization schedule shows the allocation of the monthly payment to ward interest and
principal.
In construction of amortization schedule, first find amount of payment for each period (R).
Lay out of amortization Schedule
Payment number Periodic payment Interest (I) Reduction to Principal balance
(R) principal
NOTE: Reduction to principal = periodic payment – interest
Example 07
Construct an amortization schedule for a 3 years loan of $5,000 at 5% interest, which is to be repaid
in quarterly installments over 3 years.
Practice Problems 01
1. If you deposit $6500 into an account paying 8% annual interest compounded monthly, how
much money will be in the account after 7 years? (Ans. A = $11,358.24)
2. If you deposit $8000 into an account paying 7% annual interest compounded quarterly, how
long until there is $12400 in the account? (Ans. t = 6.32 years)
3. You deposit $700 into a savings account that earns 2% interest compounded annually. Find
the balance of the account after 4 years. Round your answer to 2 decimal places (Ans. A =
$757.70)
4. Find the accumulated value of an annuity of Tsh750 invested at the end of each
quarter for five years at an annual rate of 8% compounded quarterly (Ans. =Tsh
18223.03)
5. Find the accumulated value of annuity of Tsh50 at the end of each month for 2years
at an annual rate of 9% compounded monthly. (Ans=Tsh1309.421)
6. XYZ savings Bank pays interest at the rate of 4% annually compounded quarterly.
How much money will Roger have in the bank at the end of 5years if he deposits
Tsh250 at the end of each quarter?. (Ans=Tsh5504.75)
7. How much interest is earned in 10years is Tsh100 is deposited at the end of each
month in an account that pays 15% compounded monthly?. (Ans=Tsh15521.71)
8. Mr. Joseph deposits Tshs1200000 in a bank recurring deposit every 6 months for 5
years. Interest is compounded semi-annually. The rate of interest is 8%.
9. A refrigerator can be purchased for Tsh150 down and Tsh50 a month for 18 months.
What is the equivalent price if the refrigerator is purchased for cash?. Assume that
the interest rate on credit is 15% compounded monthly. (Ans=Tsh951.48)
10. Mr. Smith would like to receive Tsh4000 each quarter for 10years after he retires.
How much money does he have in a money market fund which pays at the rate of
8% compounded quarterly?. (Ans=109422)
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11. An employee of ABC Ltd. Takes a loan of Tsh50 million for a personal emergency. The
company puts the condition that the loan is to be repaid in 6 equated monthly
installments (EMI) @ concessional rate of 6% per annum. The installment starts from
30 days after the loan is taken. What is the amount of EMI which the employee has
to provide for serving the debt?. (Ans=Tshs8.48033million)
12. Mrs. Rose has taken a person loan of Tshs625000 from a commercial bank in
Tanzania at the rate of 12% per annum. The loan is to be repaid in one year through
equated monthly installments (EMI). As a banker, compute the EMI and prepare the
loan amortization table.
13. Global Inc. has Tshs2500 million bonds outstanding as of 31st December 20x3. Bank
deposits earn an interest of 9% per annum. The company wishes to create a sinking
fund for the purpose of redemption of this bonds repayable at the end of 10 years.
Determine the amount to be deposited in the sinking fund per annum to accumulate
to Tshs2500 million in order to redeem the bonds issue. (Ans=Tshs389.53 million)
14. Anthony wants to buy a boat which costs Tshs17000. He has saved Tshs5000, which
he will use as a deposit, and he will finance the rest of it by taking out a loan to be
paid back in equal monthly installments, amortized over 5years at an annual interest
rate of 12%. What will his payment be?. (Ams.=Tshs266.93)
15. A city issues Tshs1000000 worth of bonds to raise capital to improve its sewage
treatment system. What semi-annual deposits must be made into a sinking fund
earning interest at 8% compounded semi annually in order to redeem the bonds at
the end of 15years?. (Ans.=Tshs17830.10)
16. Construct a sinking fund schedule which describes the accumulation of a sinking fund
in which Tshs20000 is to be accumulated in 3 years if payments are made semi-
annually into an account which pays 8% compounded every 6 months.
17. A sinking fund of equal monthly payments is established to accumulate Tshs 100000
in 5 years. If the annual interest rate is 15%, how much interest will the fund
accumulate in that period of time?. (Ans.=Tshs32260.60)
18. At age 30, Mr. Bixby begins to save for his retirement by depositing Tshs 200 every 3
months into a saving account that pays 5% interest compounded quarterly. At age of
60 he decides to retire, using his savings account as the basis of an annuity. How
much will he get every quarter if he want to get equal payments for the next
20years?. Assume the interest rate to be fixed at 5% 0ver the full50-year period.
(Ans.=Tshs 1092.42)
