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Financial Math
Unit 1: IB Diploma Math
LIVE NOTES Sections 1.2
Full detailed step by step solution with necessary theory
with Examiner approach

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Question Compound Interest 8 Marks
Paul purchases an air-conditioning machine for $ 26000. But he pays only $ 6000
to the showroom. Rest he pays in 30 installments and completes the balance payment. He pays an
equated monthly installment of $ 915. How much the showroom charges the interest if they apply
compound interest

Solution
Purchase Amount = $ 26,000
Down payment = $ 6000
Amount exposure for Loan = $ 20000
Let r% be the rate of interest
𝑟
From above we can write 𝑟% = 100 = 𝑖
As the standard practice is a compound interest on a reducible balance
the interest have to be calculated monthly
𝑟%
Let = 𝑥(𝑠𝑎𝑦)…..(1)
12

Let $ 20000 = p
Let $ 915= m
Month 1 balance of the loan = (p-m)x
Month 2 balance of the loan = (px-mx-m)x= px2-mx2-mx
Month 3 balance of the loan = [px2-mx2-mx-m]x= px3-mx3-mx2-mx
…
Month 30 balance must be zero once he pays $ m as it says he
repays the loan taken
So px30-mx30-mx29-mx28-…..-mx2-mx=0
=> px30-m(x30+x29+x28-…..+x2+x+1)=0
=> px30-m(1+x+x2+…. x28+x29+x30)=0
=> px30-m(GP with first term a=1 and common ratio x and n=31 )=0
1(𝑥 31 −1)
=> px30 = m( )
𝑥−1
=> put x30= u
(𝑢𝑥−1)
=> pu = m( 𝑥−1 )
=> pux-pu=mux-m
=>ux(p-m)-pu+m=0
=>x31(20000-915)-20000(x30)+915=0
=> 3817 x31-4000x30+181=0
=> x = 1.0569
𝑟%
=> From (1) = 1.0569
12
=> r= 12.6828% or r=12.68%
The showroom has charged 12.68% to recover the loan of $ 20000 in 30 months

PROF.IYER TEACIHNG IB , AP and A LEVEL SINCE 2005 ib.mathfaculty@gmail.com

Question 2 Compound Interest 8 Marks
If Yuvan is investing $ 2000 in a Bank ABC. Bank ABC gives an
Compound interest @ 12% per annum. Yuvan withdraws the money
entire money in 3 years and reinvest in Bank XYZ which gives 1% more
than ABC for same period of time as ABC
a. Find the amount he gets from Bank ABC
b. How much more gain Yuvan makes in his reinvestment
Solution
PV = $2000 and FV = PV(1+i) T
𝑟 12
i= = = 0.12
100 100
FV = 2000(1+0.12)3
FV = 2000(1.12)3

The amount earnt to the nearest dollar = $ 2810

Do not use the rounded output for (b)
b. Gain XYZ- Gain ABC ( because returns in XYZ is more than ABC)
Gain ABC = 2809.856- 2000 = 809.856
Gain XYZ = 2809.856 (1.13)3-2809.856

Gain XYZ = 1244.476 from reinvestment

Gain ABC = 809.856 from investment
More Gain = Gain XYZ- Gain ABC = $ 434.62
More Gain = Nearest $ = $ 435

PROF.IYER TEACIHNG IB , AP and A LEVEL SINCE 2005 ib.mathfaculty@gmail.com

Question 2 Compound Interest 8 Marks
If Arjun is investing $ 2000 each in 3 Banks for 5 years.
The three Banks are :
• Bank A
• Bank B
• Bank C

Bank A gives 8% returns as Compound interest per annum

Bank B gives 8% returns as Compound interest per annum
compounded quarterly
Bank B gives 8% returns as Compound interest per annum
compounded monthly

a) How much Arjun earns in Bank A

b) Which Bank is more profitable for Arjun
c) By How much more in percentage each Bank is more than
the other in returns to the customer

Solution
a) PV = $2000 and FV = PV(1+i) T
𝑟 8
i= = = 0.08
100 100
FVA= 2000(1+0.08)5
FVA = 2000(1.08)5

Returns = $ 2938.66 or rounded to nearest dollar =$ 2939

PROF.IYER TEACIHNG IB , AP and A LEVEL SINCE 2005 ib.mathfaculty@gmail.com

 b) Bank B .Compounded Quarterly
𝑖
PV = $2000 and FV = PV(1 + ) 4T
4
𝑟 8
i= = = 0.08
100 100
FVA= 2000(1+0.02)20
FVA = 2000(1.02)5

Returns = $ 2971.89 or rounded to nearest dollar =$ 2972

Bank C .Compounded Monthly

𝑖
PV = $2000 and FV = PV(1 + ) 12T
12
𝑟 8
i= = = 0.08
100 100

Returns = $ 2979.69 or rounded to nearest dollar =$ 2980.

PROF.IYER TEACIHNG IB , AP and A LEVEL SINCE 2005 ib.mathfaculty@gmail.com

c) Returns: Bank C > Bank B > Bank A

(𝐵𝑎𝑛𝑘 𝐵−𝐵𝑎𝑛𝑘 𝐴)
In % 𝑋100 =
𝐵𝑎𝑛𝑘𝐴

(2971.86−2938.66)
In % 𝑋100 = 1.129 %
2938.66
Bank B gives 1.129 % or 1.13 % (2 dp) more returns than Bank A

(𝐵𝑎𝑛𝑘 𝐶−𝐵𝑎𝑛𝑘 𝐵)
In % 𝑋100 =
𝐵𝑎𝑛𝑘𝐵

(2979.69−2971.29)
In % 𝑋100 = 1.13% ( 2 𝑑𝑝 𝑟𝑜𝑢𝑛𝑑𝑒𝑑)
2971.29
Bank C gives 0.82% more returns than Bank B

PROF.IYER TEACIHNG IB , AP and A LEVEL SINCE 2005 ib.mathfaculty@gmail.com