Mathematics of finance: Solutions to revision questions

(Please note that these questions can easily be solved using the recommended
calculator. This is what is expected from you in the examination.)

Question 1

The amount invested in Bank A is calculated using simple interest as follows:

Principal = R2 000

Time = 3 years 2 months = 3.167years

Interest rate = 9.5% = 0.095

The total amount at the end of the period is

S = P(1 + RT)

S = 2000(1 + 0.095(3.167))

S = R2 601.67

The correct answer is [2]

Question 2

For Bank B, the interest is compounded monthly. Hence

Principal = R2 000

Time = 3 years 2 months = 38 months

.
Interest rate = = 0.0079167

The amount obtained is

S = P (1 + R)T

S = 2000 (1 + 0.0079167)38

S = R2 698.77

The correct answer is [2]

Question 3

We need to equate the total payments to the total obligations due at the end of year
three.

Debts

The values of the R780 and R7 000 debts must be moved to the end of year three.

For the R780 debt

The future value is

S = P (1 + R)T

S = 780 (1 + 0.11)1

S = 865.80

For the R7 000 debt

The value of the R7 000 debt at the end of year three is

S = P (1 + R)-T

S = 7000 (1 + 0.11)-1

S = R6 306.31

Payments

There are two payments, namely R1 300 at the end of year one and Rx at the end of
year three.

For the R1 300 payment

The future value is

S = P (1 + R)T

S = 1300 (1 + 0.11)2

S = R1 601.73

Total payments = Total obligations

1601.73 + x = 865.80 + 6306.61

1601.73 + x = 7172.11
x = 7172.11 – 1601.73

x = R5 570.38

The correct answer is [1]

Question 4

From the 2nd birthday to the 22nd birthday, there are 21 payments.

The amount accumulated is obtained as follows

R = 5000

i = 0.16

n = 21

S=R

.
S = 5000
.

S = 5000 (134.8405)

S = R674 202.53

The correct answer is [1]

Question 5

From June 1991 to Dec 2010, there are 40 half years.

The amount accumulated is obtained as follows

R = 300
.
i= = 0.065

n = 40

S=R
 .
S = 300
.

S = 300 (175.6319)

S = R52 689.57

The correct answer is [1]

Question 6

We know the following

S = 55 000
.
i= = 0.065

n = 40

R=?

Hence the payment is calculated as follows:

S=R

.
55 000 = R .

55 000 = 175.6319R

R=
.

R = 313.15

The correct answer is [1]

Question 7

There are 4 quarters in a year and in 3 years, there are 12 quarters (3x4 = 12). The
.
present value is (65500 -3000) = 62500 and the interest rate per quarter is =
0.03375

Hence, the quarterly payment is obtained from

P=R

.
62 500 = R . .

.
62 500 = R . .

62 500 = (9.7348)R

R=
.

The quarterly payment is R 6 420.26

The correct answer is [2]

Question 8

We know the following information:

R = 6800

i= 0.03375

t = 12 quarters

P=?

Hence

P=R

.
P = 6 800
. .

.
P = 6 800
. .

P = 6 800 (9.7348)

P = R66 196.72 which will approximate to

P = R 66 197

He still has the deposit of R3 000.Hence he can add it to R 66 197 which will give him a
total of R69 197

The correct answer is [3]

Question 9

In 5 years, we have 20 quarters ( i.e 4 x5 = 20) and the interest rate per quarter is
.
= 0.045

The time line is shown below:

X X X payment

↑------↑-------↑------↑-------↑-------↑-------↑-------↑-------↑--------↑--------↑

0 2 4 6 8 10 12 14 16 18 20 quarters

(900 000)

a)
The present value of all payments must be equal to the loan amount of
R900 000. Hence,

X (1 + 0.045)-2 + X (1 + 0.045)-8 + X (1 + 0.045)-20 = 900 000

X (1.045)-2 + X (1.045)-8 + X (1.045)-20 = 900 000

X ( (1.045)-2 + (1.045)-8 + (1.045)-20 ) = 900 000

2.033558 X = 900 000

X=
.

X = 442 574.05

The amount paid at each instalment is R442 574.05

The correct answer is [1]

Question 10

The total amount paid for the house will be equal to the sum of the three instalments
and the deposit. Hence,

Total amount = 442 574.05 + 442 574.05 + 442 574.05 + 300 000

= 1 627 722.15

The correct answer is [2]