1

Tutorial 5: Compound Interest Solution

1. Determine the accumulated value of $1000 at the end of 10 years if i = 6%

𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛

𝐹𝑉 = 1,000(1 + 0.06)10

𝐹𝑉 = $1,790.85

2. In 1492, Queen Isabella sponsored Christopher Columbus’ journey by giving him $10,000.
If she had placed this amount in a bank account at 1% per annum, how much money would be
in the account in 2018 with compound interest? With simple interest?

Compound interest:

𝐹𝑉 = 10,000(1 + 0.01)526

𝐹𝑉 = $1,875,178.48

Simple Interest:

𝐹𝑉 = 10,000(1 + 0.01 ∗ 526)

𝐹𝑉 = $62,600

3. A man can buy a piece of land for $400,000 cash or payments of $230,000 down and
$200,000 in 5 years. If the interest rate is 4% p.a., which plan is better?

Present value of Option 1 (cash payment): $400,000

Present value of Option 2:

200,000
𝑃𝑉 = 230,000 +
(1 + 0.04)5

𝑃𝑉 = $394,385.42

Therefore, option 2 is cheaper

4. How long will it take for money to triple at a rate of 6% p.a.?

3𝑃𝑉 = 𝑃𝑉(1 + 0.06)𝑛

3 = (1.06)𝑛

𝑙𝑛3 = 𝑛 ∗ 𝑙𝑛(1.06)

𝑙𝑛3
=𝑛
𝑙𝑛(1.06)

18.84 𝑦𝑒𝑎𝑟𝑠 = 𝑛
 2

5. An obligation of $2500 falls due at the end of 7 years. Determine an equivalent debt at the
end of 3 years at 9% p.a.?

2500 = 𝑃𝑉(1 + 0.09)4

2500
= 𝑃𝑉
(1 + 0.09)4

$1771.06 = 𝑃𝑉

6. A debt of $5000 is due at the end of 5 years. It is proposed that $X be paid now, with another
$X to be paid in 10 years to liquidate the debt. Calculate the value of X if the interest rate is
5% for the first 6 years and 6% for the next 4 years.
𝑥
$5000 = 𝑥(1.05)5 +
(1.06)4 ∗ (1.05)1

1
$5000 = [(1.05)5 + ]∗𝑥
(1.06)4 ∗ (1.05)1

$5000
1
=𝑥
[(1.05)5 + (1.06)4 ∗(1.05)1 ]

$1,655.21 = 𝑥

7. A person borrows $2000 to be repaid in 3 instalments, one in 6 months, one in 12 months

and one in 18 months. The second payment is to be twice as big as the first payment and the
third payment is to be 3 times the first payment. What will be the size of the payments if the
focal date is today and the compound interest rate is J12 = 12% p.a.?

𝑥 2𝑥 3𝑥
$2000 = + +
0.12 6 0.12 12 0.12 18
(1 + 12 ) (1 + 12 ) (1 + 12 )

1 2 3
$2000 = [ + + ]∗𝑥
(1.01)6 (1.01)12 (1.01)18

$2000
1 2 3
= 𝑥
[(1.01)6 + (1.01)12 + (1.01)18 ]

$382.78 = 𝑥

8. A 1-year loan of $1400 is taken today at compound interest of J12 = 12%, partial payments
of $400 in 2 months, $30 in 6 months and $600 in 8 months are made. Determine the balance
due in 1 year.

400 30 600 𝑥
$1400 = + + +
0.12 2 0.12 6 0.12 8 0.12 12
(1 + ) (1 + ) (1 + ) (1 + )
12 12 12 12
 3

400 30 600 𝑥
$1400 = + + +
(1.01) 2 (1.01) 6 (1.01) 8 (1.01)12

400 30 600 𝑥
$1400 − − − =
(1.01)2 (1.01)6 (1.01)8 (1.01)12

400 30 600
[$1400 − − − ] ∗ (1.01)12 = 𝑥
(1.01) 2 (1.01) 6 (1.01)8

$479.50 = 𝑥

9. You borrow $1000 now, and $3000 in 4 months. You agree to pay $X in 6 months and $2X
in 8 months. Determine the value of X using compound interest rate of J12 = 12%, and focal
date of 5 months

0.12 5 0.12 1 𝑥 2𝑥
$1000 (1 + ) + $3000 (1 + ) = +
12 12 0.12 1 0.12 3
(1 + ) (1 + )
12 12

𝑥 2𝑥
$1000(1.01)5 + $3000(1.01)1 = +
(1.01)1 (1.01)3

1 2
$1000(1.01)5 + $3000(1.01)1 = [ + ]∗𝑥
(1.01)1 (1.01)3

$1000(1.01)5 + $3000(1.01)1
1 2
= 𝑥
[(1.01)1 + (1.01)3 ]

$4081.01005
1 2
= 𝑥
[(1.01)1 + (1.01)3 ]

$1392.22 = 𝑥