Chapter 6

Exercises

1. Karabo has borrowed R35 000 at an interest rate of 8.75% p.a. compounded monthly. He is
to repay the loan by way of monthly payments in arrear over 6 years. Each payment will
increase by 2% compared to the last.

Determine the amount of the first and last repayment.

2. If the first payment of an annuity payable for 12 years is R 3500, and payments decrease by
3% each time, find the present value of the annuity at an interest rate of 16% compounded
quarterly. Payments are made quarterly in arrears.

3. Mike is investing in a retirement annuity. He makes payments twice-yearly in arrears into

the policy, his first payment being R1000. Payments increase by 6% every year. The policy
earns interest at 8%p.a. compounded effective.

What is the accumulated value of the policy after 20 years?

4. Find the future value of an annuity paid quarterly in advance for 15 years at an interest rate
of 10% p.a compounded quarterly. The first payment is R800 and subsequent payments
increase by 4% each time.

5. An annuity is payable annually in arrear for n years. The first payment is 1 and thereafter
the amount of each payment increases by r%. The annuity is discounted using an interest
rate of i% per period. Assume r<i

a) Derive a formula for the present value of the annuity using the theory of geometric
series’.
b) Find an expression for the present value of the annuity in terms of the basic annuity
functions.
c) Show that you answers to a) and b) are equivalent.