# Credit and borrowing. In this chapter. syllabusreference. Financial mathematics 4 Credit and borrowing

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1 Credit and borrowing syllabusreference Financial mathematics 4 Credit and borrowing In this chapter A B C D E Flat rate interest Home loans The cost of a loan Credit cards Loan repayments

2 reyou READY? Are you ready? Try the questions below. If you have difficulty with any of them, extra help can be obtained by completing the matching SkillSHEET. Either click on the SkillSHEET icon next to the question on the Maths Quest HSC Course CD-ROM or ask your teacher for a copy Converting a percentage to a decimal Convert each of the following percentages to decimals. a 40% b % c 8% d.4% e 0.% f 7 -- % g -- % h 0.0% Finding a percentage of a quantity (money) Find: a 0% of \$5000 b 5% of \$790 c 7.4% of \$5 000 d 0.45% of \$600 e -- % of \$8 000 f 0.06% of \$ Calculating simple interest Calculate the simple interest earned on an investment of: a \$7000 at 9% p.a. for 4 years b \$ at 6.5% p.a. for years c \$ at 7 -- % for -- years d \$ at 5.% p.a. for 9 months Finding values of n and r in financial formulas 4 Find the value of n and r for each of the following investments a Interest of 6% p.a. for 5 years with interest calculated annually b Interest of 9% p.a. for 4 years with interest calculated six-monthly c Interest of 8.8% p.a. for years with interest calculated quarterly d Interest of 7.% p.a. for 0 years with interest calculated monthly e Interest of % p.a. for June with interest calculated daily Calculating compound interest 5 Use the formula A = P( + r) n to calculate the amount to which each of the following investments will grow. a \$7000 at 9% p.a. for 4 years with interest compounded annually b \$ at 6.% p.a. for 6 years with interest compounded six-monthly Calculate the amount of compound interest earned on an investment of: c \$8 000 at 9.% p.a. for years with interest compounded annually d \$ at 8.4% p.a. for 0 years with interest compounded quarterly Substitution into a formula 6 Evaluate each of the following by substituting into the given formula. m a If d = ---, find d when m = 0 and v =. v b If A = -- (x + y)h, find A when h = 0, x = 7 and y =. c If s = ut + -- at, find s when u = 0.8, t = 5 and a =.. 4

3 Chapter Credit and borrowing Flat rate interest During the preliminary course we calculated the simple interest earned on investments. Flat rate interest is the borrowing equivalent of simple interest. Flat rate interest applies to many small loans and hire purchase agreements. When money is borrowed from a lending institution such as a bank at a flat rate of interest, the total amount of interest is calculated as a percentage of the initial amount borrowed and then this is multiplied by the term of the loan. The term of the loan is the length of time which the loan is agreed to be repaid over. The formula for calculating the amount of flat interest to be paid on a loan is the same formula as for simple interest (I): I = Prn where P = initial quantity r = percentage interest rate per period expressed as a decimal n = number of periods As you work through the financial mathematics strand there are several formulas that use the same pronumerals. While the initial quantity (P) will be the principal in an investing scenario, it will represent the amount borrowed in a loans situation. All of these formulas use the same pronumerals and all of them require r to be expressed as a decimal. It should be part of your normal practice when doing such questions to convert the interest rate, expressed as a percentage, to a decimal. In simple or flat rate interest, r will always be a rate per annum or per year and there will be no variation on this regardless of how often interest is paid. Similarly, n will always be the number of years of the investment or loan. WORKED Example Calculate the flat interest to be paid on a loan of \$0 000 at 7.5% p.a. flat interest if the loan is to be repaid over 5 years. THINK WRITE 4 Convert the interest rate to a decimal. r = = Write the formula. Substitute the values of P, r (as a decimal) and n. I = Prn Calculate. = \$7500 = \$ Once the interest has been calculated, we can calculate the total amount that must be repaid in a loan. This is calculated by adding the principal and the interest.

4 4 Maths Quest General Mathematics HSC Course Alvin borrows \$8000 to buy a car at a flat rate of 9% p.a. interest. Alvin is to repay the loan, plus interest, over 4 years. Calculate the total amount that Alvin is to repay on this loan. THINK 4 5 WORKED Example WRITE Convert the interest rate to a decimal. r = 9 00 = 0.09 Write the interest formula. I = Prn Substitute the values of P, r and n. = \$ Calculate the interest. = \$880 Calculate the total repayments by adding the interest and principal. Total repayments = \$ \$880 Total repayments = \$0 880 Graphics Calculator tip! Calculate simple interest Your Casio graphics calculator can perform a number of financial functions by using the TVM mode. One of the options in this mode is to calculate simple interest. Examples such as worked example above are more simply done using the arithmetic method as shown above. However, for some of the more complex questions later in this chapter it is worth familiarising yourself with this method.. From the MENU select TVM.. Press F to select Simple Interest.. The calculator has two modes of calculating interest: 60 day mode or 65 day mode. You need to make sure that it is on 65 day mode. If not, press SHIFT [SET UP], select Date Mode and press F for Press EXE to return to the previous screen and enter the data for worked example. n = 4 65 (as n is in days) I% = 9 PV = 8000 (principal or present value is entered as a negative)

5 Chapter Credit and borrowing 5 5. The calculator gives you two options. Press F (SI) for simple interest Press F (SFV) for future value (in other words, the principal plus interest). In this example we want the total repayments, so we press F (SPV). Most loans are repaid on a monthly basis. Once the total amount to be repaid has been calculated, this can be divided into equal monthly, fortnightly or weekly instalments. WORKED Example Narelle buys a computer on hire purchase. The cash price of the computer is \$000, but Narelle must pay a 0% deposit with the balance paid at 8% p.a. flat rate interest in equal monthly instalments over years. a Calculate the deposit. b Calculate the balance owing. c Calculate the interest on the loan. d Calculate the total amount to be repaid. e Calculate the amount of each monthly instalment. THINK WRITE a Find 0% of \$000. a Deposit = 0% of \$000 Deposit = \$00 b Subtract the deposit from the cash price to find the amount borrowed. b Balance = \$000 \$00 Balance = \$700 c Write the interest formula. c I = Prn Substitute for P, r and n. I = \$ Calculate the interest. I = \$648 d Add the interest to the amount borrowed. d Total repayments = \$700 + \$648 Total repayments = \$48 e Divide the total repayments by 6 (the number of monthly instalments in years). e Monthly repayments = \$48 6 Monthly repayments = \$9.00 If given the amount to be repaid each month, we can calculate the interest rate. The interest on the loan is the difference between the total repaid and the amount borrowed. This is then calculated as a yearly amount and written as a percentage of the amount borrowed.

6 6 Maths Quest General Mathematics HSC Course WORKED Example Theresa borrows \$ 000 to buy a car. This is to be repaid over 5 years at \$0 per month. Calculate the flat rate of interest that Theresa has been charged. THINK 4 WRITE Calculate the total amount that is repaid. Total repayments = \$0 60 Total repayments = \$9 00 Subtract the principal from the total repayments to find the interest. Interest = \$9 00 \$ 000 Interest = \$700 Calculate the interest paid each year. Interest per year = \$700 5 Interest per year = \$440 4 Write the annual interest as a \$440 Interest rate = % percentage of the amount borrowed. \$ 000 Interest rate = % remember. Flat rate interest is the borrowing equivalent of simple interest. It is calculated based on the initial amount borrowed.. The simple interest formula is used to calculate the amount of flat rate interest to be paid on a loan. The simple interest formula is I = Prn.. The total amount to be repaid on a loan is the principal plus interest. To calculate the amount of each instalment, we divide the total amount by the number of repayments. 4. When given the amount of each instalment, we can calculate the flat rate of interest. SkillSHEET SkillSHEET SkillSHEET. WORKED Converting Example a percentage to a decimal. Finding a percentage of a quantity. Calculating simple interest WORKED Example A Flat rate interest Calculate the amount of flat rate interest paid on each of the following loans. a \$5000 at 7% p.a. for years b \$8000 at 5% p.a. for years c \$5 000 at 0% p.a. for 5 years d \$9500 at 7.5% p.a. for 4 years e \$500 at 0.4% p.a. for 8 months Roula buys a used car that has a cash price of \$7500. She has saved a deposit of \$000 and borrows the balance at 9.6% p.a. flat rate to be repaid over years. Calculate the amount of interest that Roula must pay. Ben borrows \$4000 for a holiday. The loan is to be repaid over years at.5% p.a. flat interest. Calculate the total repayments that Ben must make. 4 Calculate the total amount to be paid on each of the following flat rate interest loans. a \$500 at 8% p.a. over years b \$ 500 at.6% p.a. over 5 years c \$500 at.5% p.a. over 8 months d \$00 at % p.a. over month e \$ at 7% p.a. over 5 years

7 Chapter Credit and borrowing 7 WORKED Example 5 Mr and Mrs French purchase a new lounge suite, which has a cash price of \$5500. They purchase the lounge on the following terms: 0% deposit with the balance to be repaid at 9% p.a. flat interest over years. Calculate: a the deposit b the balance owing c the interest to be paid d the total amount that they pay for the lounge. 6 Yasmin borrows \$5000 from a credit union at a flat interest rate of 8% p.a. to be repaid over 4 years in equal monthly instalments. Calculate: a the interest that Yasmin must pay on the loan b the total amount that Yasmin must repay c the amount of each monthly repayment. 7 Ian borrows \$000 from a pawnbroker at 40% p.a. interest. The loan is to be paid over year in equal weekly payments. a Calculate the interest on the loan. b Calculate the total that Ian must repay. c Calculate Ian s weekly payment. 8 The Richards family purchase an entertainment system for their home. The total cost of the system is \$8000. They buy the system on the following terms: 5% deposit with the balance repaid over years at % p.a. flat interest in equal monthly instalments. Calculate: a the deposit b the balance owing c the interest on the loan d the total repayments e the amount of each monthly repayment. 9 Sam buys an electric guitar with a cash price of \$00. He buys the guitar on the following terms: one-third deposit, with the balance at 5% p.a. flat interest over years in equal monthly instalments. Calculate the amount of each monthly repayment. 0 multiple choice The amount of flat rate interest on a loan of \$0 000 at 0% p.a. for years is: A \$000 B \$000 C \$ 000 D \$ 000 multiple choice A refrigerator with a cash price of \$800 is bought on the following terms: 0% deposit with the balance paid in equal monthly instalments at % p.a. flat interest. The total cost of the refrigerator when purchased on terms is: A \$7.80 B \$6.00 C \$97.80 D \$06.00 Simple interest EXCEL Spreadsheet GC program Interest Interest Casio GC program TI

8 8 Maths Quest General Mathematics HSC Course WORKED Example 4 Andy borrows \$4000, which is to be repaid over 4 years at \$0 per month. Calculate the flat rate of interest that Andy has been charged. Sandra buys a used car with a cash price of \$ 000 on the following terms: 0% deposit with the balance paid at \$89. per week for years. Calculate: a the deposit b the balance owing c the total cost of the car d the flat rate of interest charged. 4 Calculate the flat rate of interest charged on a lounge suite with a cash price of \$5000 if it is purchased on the following terms: 5% deposit with the balance paid at \$0. per month for years. Computer Application Flat rate interest loan calculator EXCEL Spreadsheet Flat interest Access the spreadsheet Flat Interest from the Maths Quest General Mathematics HSC Course CD-ROM. This spreadsheet will demonstrate how to calculate a deposit, the total repayments on a loan and the size of each repayment. Monthly payment calculator Consider a \$5000 loan to be repaid at 9% p.a. flat rate interest over years.. On the sheet titled Monthly Payments, in cell B5 enter the amount which has been borrowed (\$5000), or the balance owing on a purchase after the deposit has been paid.. In cell B7 enter the interest rate as a percentage (9%).. In cell B9 enter the number of years over which the loan is to be repaid ().

9 Chapter Credit and borrowing 9 4. The total interest paid on the loan will be displayed in cell B. The formula for this will be displayed in this cell. 5. Cell B shows the total amount to be repaid and cell B5 shows the amount of each repayment. Flat interest rate calculator The worksheet Flat Interest Rate will calculate the flat rate of interest charged given the amount of each repayment. Consider a \$5 000 loan that is repaid over 5 years at \$50 per month.. In cell B5 enter the amount borrowed (\$5 000).. In cell B7 enter the amount of each monthly payment (\$50).. In cell B9 enter the total number of monthly payments (60). 4. Displayed will be the total amount to be repaid (cell B), the total interest paid on the loan (cell B), the amount of interest paid per year (cell B5) and the flat rate of interest (cell B7). Check your answers to the previous exercise using this spreadsheet. Home loans The biggest loan that most people will ever take out will be for a home. These loans are usually for large amounts of money and are taken over long periods of time. Most commonly they are taken over 0, 5, 0 or 5 years but they can be taken over even longer periods of up to 5 years. Home loans are not charged at a flat rate of interest. The interest on these loans is reducible, which means that the interest is calculated on the amount of money owing on the loan at the time rather than on the amount initially borrowed. This is known as a reducing balance loan. The interest on a home loan is usually calculated at the beginning of each month, and payments are calculated on a monthly basis. So each month interest is added to the loan and a payment is subtracted from the balance owing. The balance increases by the amount of interest and then decreases by the amount of each payment.

10 0 Maths Quest General Mathematics HSC Course Consider the case of a person who borrows \$ to buy a home at 9% p.a. reducible interest. The monthly repayment on this loan is \$500 per month. The interest rate of 9% p.a. converts to 0.75% per month. First month s interest = 0.75% of \$ = \$875 Balance owing = \$ \$875 \$500 = \$49 75 In the second month the interest is calculated on the balance owing at the end of the first month. Second month s interest = 0.75% of \$49 75 = \$870. Balance owing = \$ \$870. \$500 = \$ The progress of this loan can be followed in the following computer application. Computer Application Home loan calculator EXCEL Spreadsheet Home loan Access the spreadsheet Home Loan from the Maths Quest General Mathematics HSC Course CD-ROM. This spreadsheet will allow you to follow the progress of a home loan as it is paid off. Use the Edit and then the Fill and Down functions on columns A, B, C and D. Look down column D to find when the balance owing becomes 0 or when it becomes negative. At this time the loan will have been fully repaid. Examine other loans by changing the data in C4, C5 and C6.

11 Chapter Credit and borrowing WORKED Example 5 Mr and Mrs Chan take out a \$ home loan at 8% p.a. reducible interest over 5 years. Interest is calculated and added on the first of each month. They make a payment of \$775 each month. Calculate: a the interest added after one month b the balance owing after one month. THINK WRITE a Convert 8% p.a. to a monthly rate. a 8% p.a. = -- % per month Calculate -- % of \$ to find the Interest = -- % of \$ interest for one month. Interest = \$ b Add the interest to the principal and subtract the repayment. b Balance owing = \$ \$ \$775 Balance owing = \$ Graphics Calculator tip! Calculate the interest in a one-month period We can use the TVM function to calculate the interest for a one-month period but great care needs to be taken. Remembering that the interest is calculated for a number of days, to calculate monthly interest we need to enter n = 65. Consider the method shown below for worked example 5.. From the MENU select TVM.. Press F to select Simple Interest.. n = 65 (as n is in days) I% = 8 PV = Press F (SI) to find the interest for one month. When interest is calculated every year for such a long period of time, as with many home loans, the amount of money required to pay off such a loan can be a great deal more than the initial loan.

12 Maths Quest General Mathematics HSC Course WORKED Example 6 A loan of \$0 000 is paid off at 9% p.a. reducible interest over a period of 5 years. The monthly repayment is \$ Calculate the total amount made in repayments on this loan. THINK Calculate the number of repayments by multiplying the number of years by. Multiply the monthly repayment by the number of repayments. WRITE No. of repayments = 5 No. of repayments = 00 Total repayments = \$ Total repayments = \$0.00 remember. The interest on home loans is calculated at a reducible rate. This means that the interest is calculated on the balance owing rather than the initial amount borrowed.. Interest is calculated each month; this is then added to the principal and a payment is made. The interest next month is then calculated on the new amount owing.. To calculate the total amount to be repaid on a home loan, we multiply the monthly payment by the number of repayments made. SkillSHEET SkillSHEET.4 WORKED Example Finding 5 values of n and r in financial formulas.5 EXCEL Spreadsheet Calculating compound interest Interest B Mr and Mrs Devcich borrow \$ to buy a home. The interest rate is % p.a. and their monthly payment is \$850 per month. a Calculate the interest for the first month of the loan. b Calculate the balance owing at the end of the first month. The repayment on a loan of \$ at 7.5% p.a. over a 5-year term is \$668.6 per month. a Calculate the interest for the first month of the loan and the balance owing at the end of the first month. b Calculate the amount by which the balance has reduced in the first month. Home loans

13 Chapter Credit and borrowing c Calculate the interest for the second month of the loan and the balance at the end of the second month. d By how much has the balance of the loan reduced during the second month? The repayment on a loan of \$ over a 0-year term at 9.6% p.a. is \$408.0 per month. Copy and complete the table below. Month Principal (\$) Interest (\$) Balance (\$) Mr and Mrs Roebuck borrow \$ to purchase a home. The interest rate is 9% p.a. and over a 5-year term the monthly repayment is \$94.. a Copy and complete the table below. Month Principal (\$) Interest (\$) Balance (\$)

14 4 Maths Quest General Mathematics HSC Course b Mr and Mrs Roebuck decide to increase their monthly payment to \$500. Complete the table below. Month Principal (\$) Interest (\$) Balance (\$) WORKED Example 6 c How much less do Mr and Mrs Roebuck owe at the end of one year by increasing their monthly repayment? 5 The repayments on a loan of \$ at 8% p.a. reducible interest over 5 years are \$80.4 per month. Calculate the total repayments made over the life of the loan. 6 The Taylors borrow \$ over 0 years at 9% p.a. a The monthly repayment on this loan is \$59.6. Calculate the total repayments. b The Taylors attempt to pay the loan off quickly by increasing their monthly payment to \$500. The loan is then paid off in 6 months. Calculate the total repayments made under this plan. c How much will the Taylors save by increasing each monthly payment? 7 multiple choice The first month s interest on a \$ home loan at % p.a. reducible interest is: A \$600 B \$700 C \$ D \$ multiple choice A \$ loan at 8% p.a. reducible interest over a 5-year term has a monthly payment of \$ The total amount of interest paid on this loan is: A \$7600 B \$ C \$4 000 D \$ Mr and Mrs Chakraborty need to borrow \$ to purchase a home. The interest rate charged by the bank is 7% p.a. Calculate the total interest paid if the loan is taken over each of the following terms: a \$ per month over a 5-year term b \$775.0 per month over a 0-year term c \$898.8 per month over a 5-year term d \$6.08 per month over a 0-year term.

15 Chapter Credit and borrowing 5 0 The Smith and Jones families each take out a \$ loan at 9.5% p.a. reducible interest. The Smith family repay the loan at \$000 per month and the Jones family repay the loan at \$000 per month. a How much does each family make in repayments in the first year? b Complete the table below for each family. Smith family Month Principal (\$) Interest (\$) Balance (\$) Jones family Month Principal (\$) Interest (\$) Balance (\$) c After one year how much less does the Jones family owe than the Smith family?

16 6 Maths Quest General Mathematics HSC Course Calculate the amount of flat rate interest payable on a loan of \$500 at 4% p.a. to be repaid over years. Calculate the amount of flat rate interest payable on a loan of \$65 at 9.% p.a. to be repaid over -- years. Calculate the total repayments on a loan of \$5000 at.5% p.a. to be repaid over years. 4 Susan buys a lounge suite on terms. The cash price of the lounge is \$6500 and she pays a 5% deposit. Calculate the amount of the deposit. 5 Calculate the balance that Susan owes on the lounge suite. 6 Calculate the interest that Susan will pay at 7% p.a. flat rate interest for a period of years. 7 Calculate the total amount that Susan will have to repay. 8 Calculate the monthly repayment that Susan will need to make. 9 Harry and Sally borrow \$ to purchase a home. The interest rate is % p.a. Calculate the amount of interest payable for the first month. 0 A \$ loan that is repaid over 5 years has a monthly repayment of \$ Calculate the total amount of interest that is paid on this loan. The cost of a loan Because of the different ways that interest can be calculated, the actual interest rate quoted may not be an accurate guide to the cost of the loan. By using a flat rate of interest, a lender can quote an interest rate less than the equivalent reducible interest rate. To compare flat and reducible rates of interest, we need to calculate the effective rate of interest for a flat rate loan. The effective rate of interest is the equivalent rate of reducible interest for a flat rate loan. The formula for effective rate of interest is: ( + r) E n = n where E = effective rate of interest, expressed as a decimal r = stated rate of flat interest expressed as a decimal n = term of the loan in years Note: This formula for effective rate of interest is not on your formula sheet. This does not mean that you have to memorise it as the formula will be given to you as a part of any question that requires you to use it.

17 Chapter Credit and borrowing 7 WORKED Example 7 Andrea takes out an \$8000 loan for a car over 5 years at 6% p.a. flat rate interest. Calculate the effective rate of interest charged on the loan. THINK WRITE Write the formula. ( + r) E = n n Substitute r = 0.06 and n = 5. (.06) E = Calculate. E = Write the interest rate as a percentage. The effective rate of interest is 6.8% p.a. A loan with a reducible rate of interest can be compared to a flat rate of interest if we are able to calculate the total repayments made over the term of the loan. WORKED Example 8 An \$ loan at 0% p.a. reducible interest is to be repaid over 5 years at \$9.4 per month. a Calculate the total repayments on the loan. b Calculate the total amount of interest paid. c Calculate the equivalent flat rate of interest on this loan. THINK a Multiply the monthly repayments by the number of months taken to repay the loan. WRITE a Total repayments = \$ Total repayments = \$ b Subtract the initial amount borrowed from the total repayments. b Interest = \$ \$ Interest = \$ c Calculate the amount of interest paid per year. c Annual interest = \$ Annual interest = \$594.5 Write the yearly interest as a percentage of the amount borrowed. \$594.5 Flat interest rate = % \$ Flat interest rate = 6.% p.a. The most accurate way to compare loans is to calculate the total repayments made in each loan.

18 8 Maths Quest General Mathematics HSC Course Allison borrows \$6000 and has narrowed her choice of loans down to two options. Loan A: At 8% p.a. flat rate interest over 4 years to be repaid at \$65.00 per month. Loan B: At % p.a. reducible interest over years to be paid at \$99.9 per month. Which of the two loans would cost Allison less? THINK WORKED Example 9 WRITE Calculate the total repayments on Loan A repayments = \$ Loan A. Loan A repayments = \$790 Calculate the total repayments on Loan B repayments = \$ Loan B. Loan B repayments = \$ Write a conclusion. Loan B would cost \$ less than Loan A. In the above example Allison should take Loan B even though it has a much higher advertised interest rate. This of course would depend upon Allison s ability to meet the higher monthly payments. Generally the more quickly that you can pay off a loan the cheaper the loan will be. The savings are particularly evident when examining home loans. Some home loans that offer a lower interest rate allow for you to make only the minimum monthly repayment. This will maximise the amount of interest that the customer will pay. If a person can afford to pay more than the minimum amount, they may be better off over time by paying a slightly higher rate of interest and paying the loan off over a shorter period of time. WORKED Example 0 Mr and Mrs Beasley need to borrow \$ and have the choice of two home loans. Loan X: 6% p.a. over 5 years with a fixed monthly repayment of \$ No extra repayments are allowed on this loan. Loan Y: 7% p.a. over 5 years with a minimum monthly payment of \$ Mr and Mrs Beasley believe they can afford to pay \$800 per month on this loan. If they do, the loan will be repaid in 8 years and 9 months. Which loan would you recommend? THINK Calculate the total repayments on Loan X. Calculate the total repayments on Loan Y. Make a recommendation. WRITE Loan X repayments = \$ = \$9 90 Loan Y repayments = \$800 5 = \$ Mr and Mrs Beasley should choose Loan Y as they will save \$ 90 provided they can continue to pay \$800 per month. With loans such as the one in the above example, the savings depend upon the ability to make the extra repayments. If this is doubtful, Loan X would have been the safer option.

19 Chapter Credit and borrowing 9 The other factor to consider when calculating the cost of a loan is fees. Many loans have a monthly management fee attached to them. This will need to be calculated into the total cost and may mean that a loan with a slightly higher interest rate but no fee may be a cheaper option. remember. The actual cost of a loan is calculated by the total cost in repaying the loan. The interest rate is a guide but not the only factor in calculating cost.. A loan that is quoted at a flat rate of interest can be compared to a reducible rate of interest only by calculating the effective rate of interest on the flat rate loan. The effective rate of interest is the equivalent reducible rate of interest and is found using the formula: ( + r) E n = n. By calculating the total repayments on a loan, we can calculate the equivalent flat rate of interest paid on the loan. 4. A loan that is repaid over a shorter period of time will usually cost less than one where the repayments are made over the full term of the loan. 5. The flexibility of a loan, which includes factors such as whether extra repayments can be made, is important when considering the cost of a loan. 6. When calculating the cost of a loan, any ongoing fees need to be calculated. C The cost of a loan WORKED Example WORKED Example 8 A \$5 000 loan is to be repaid at 8% p.a. flat rate interest over a 0-year term. 7 Use the formula E ( + r) n = to calculate the effective rate of interest. n Calculate the effective rate of interest on each of the following flat rate loans. a 0% p.a. over 4 years b 8% p.a. over years c % p.a. over 5 years d 7.5% p.a. over 0 years e 9.6% p.a. over 6 years A bank offers loans at 8% p.a. flat rate of interest. Calculate the effective rate of interest for a loan taken over: a years b years c 4 years d 5 years e 0 years f 0 years. 4 An \$ home loan at 9% p.a reducible interest is to be repaid over 5 years at \$7. per month. a Calculate the total repayments on the loan. b Calculate the total amount of interest paid. c Calculate the equivalent flat rate of interest on the loan. 5 Calculate the equivalent flat rate of interest paid on a \$5 000 loan at % p.a. reducible interest to be repaid over 0 years at \$8.90 per month..6 Substitution into a formula Effective rate of interest SkillSHEET EXCEL Spreadsheet

20 0 Maths Quest General Mathematics HSC Course WORKED Example 9 WORKED Example 0 6 Kim borrows \$ 000 for a holiday to South-East Asia. She is faced with a choice of two loans. Loan I: At 0% p.a. flat rate of interest over years to be repaid at \$600 per month. Loan II: At.5% p.a. reducible interest over years to be repaid at \$40.44 per month. Which loan will cost Kim the least money? 7 Calculate the total cost of repaying a loan of \$ at 8% p.a. reducible interest: a over 5 years with a monthly repayment of \$77.8 b over 0 years with a monthly repayment of \$86.44 c over 0 years with a monthly repayment of \$.8. 8 Masako and Toshika borrow \$5 000 for their home. They have the choice of two loans. Loan : A low interest loan at 7% p.a. interest over 5 years with fixed repayments of \$8.47 per month. Loan : A loan at 7.5% p.a interest over 5 years with minimum repayments of \$9.74 per month. Masako and Toshika believe they can afford to pay \$000 per month. If they do, Loan will be repaid in 0 years and 4 months. Which loan should they choose if they could afford to pay the extra each month? 9 multiple choice A loan can be taken out at 8% p.a. flat interest or 9% p.a. reducible interest. Using the ( + r) formula E n = , the number of years of the loan (n) after which the effective n rate of interest on the flat rate loan becomes greater than the reducible rate loan is: A years B years C 4 years D 5 years 0 Glenn and Inge are applying for a \$ loan to be repaid over 5 years. a Bank A charges 7.8% p.a. interest, no fees, with the loan to be repaid at \$7.9 per month. Calculate the total cost of this loan. b Bank B charges 7.6% p.a. interest, a \$600 loan application fee, a \$5 per month management fee and repayments of \$8.6 per month. Calculate the total cost of this loan. multiple choice A \$ loan is to be taken out. Which of the following loans will have the lowest total cost? A 5% p.a. flat rate interest to be repaid over 0 years B 8% p.a. reducible interest to be repaid over 0 years at \$ per month C 6% p.a. reducible interest to be repaid over years at \$487.9 per month D 6.5% p.a. reducible interest to be repaid over 0 years at \$ per month, with a \$600 loan application fee and \$8 per month account management fee

21 Chapter Credit and borrowing A home loan of \$ is taken out over a 0-year term. The interest rate is 9.5% p.a. and the monthly repayments are \$0.. a The mortgage application fee on this loan was \$600 and there is a \$0 per month account management fee. Calculate the total cost of repaying this loan. b Calculate the equivalent flat rate of interest on the loan. (Consider the extra payments as part of the interest.) c If the loan is repaid at \$000 per month, it will take -- years to repay the loan. Calculate the equivalent flat rate of interest if this repayment plan is followed. WorkSHEET. GraphicsCalculator tip! Loan repayment function Your Casio graphics calculator can calculate the amount of each monthly repayment on a home loan when given the term of the loan and the interest rate. The PMT function, which is under the compound interest menu, allows for such calculations to be made. Consider a loan of \$ to be repaid over 5 years at 8% p.a. with interest added and repayments made monthly. We wish to find the amount of each monthly repayment.. From the MENU select TVM.. Press F to select Compound Interest.. Enter the following settings. n = 5 I% = 8 PV = PMT = FV = 0 P/Y = (payments per year) C/Y = (You will need to scroll to see this.) 4. Press F4 (PMT) to find the amount of each monthly repayment, which will be displayed as a negative.

22 Maths Quest General Mathematics HSC Course Credit cards Researching home loans Suppose that you wish to borrow \$ to buy a home. Go to a bank or other lender and gather the following information. a The annual interest rate b The loan application fee and any other costs such as stamp duty, legal costs etc. associated with establishing the loan c Is there a monthly account keeping or management fee? d The monthly repayment if the loan is repaid over: i 5 years ii 0 years iii 5 years e The total cost of repaying the loan in each of the above examples There are many ways that people can reduce the overall cost of repaying a mortgage. Research and explain why people are able to save money by adopting the following repayment strategies. a Repaying the loan fortnightly or weekly instead of monthly b Using an account where the whole of a person s net pay is deposited on the mortgage and then a redraw is used to meet living expenses Credit cards are the most common line of day-to-day credit that most people use. A credit card works as a pre-approved loan up to an amount agreed upon by the customer and the bank. The card can then be used until the amount of the debt reaches this limit. As with other types of loan, the bank charges interest upon the amount that is owed on the card and repayments must be made monthly. The way in which the interest is calculated varies with different types of credit cards. Some cards have interest charged from the day on which the purchase was made. Others have what is called an interest-free period. This means that a purchase that is made will appear on the next monthly statement. Provided that this amount is paid by the due date, no interest is charged. Hence, the customer can repay the loan within a maximum of 55 days and be charged no interest. Generally, credit cards without an interest-free period have a lower interest rate than those with an interest-free period. These cards, however, generally attract an annual fee. This annual fee can in some cases be waived if a certain amount is spent on the card over the year. The minimum monthly repayment on most credit cards is 5% of the outstanding balance, or \$0, whichever is greater. On Trevor s credit card statement he has an outstanding balance of \$ The minimum monthly payment is 5% of the outstanding balance, or \$0, whichever is greater. Calculate the minimum repayment that Trevor must make. THINK WORKED Example WRITE Calculate 5% of the outstanding balance. 5% of \$48.50 = \$57.4 Decide which repayment is greater and The minimum repayment is \$57.4. give a written answer.

23 Chapter Credit and borrowing Credit card interest is quoted as an annual amount but is added monthly. To calculate the interest due, calculate one month s interest on the outrstanding balance.. WORKED Example The outstanding balance on a credit card is \$ If the full balance is not paid by the due date, one month s interest will be added at a rate of 8% p.a. Calculate the amount of interest that will be added to the credit card. THINK Use the simple interest formula to calculate one month s interest. WRITE I = Prn I = \$ I = \$ In practice, most credit cards calculate interest on the outstanding balance at a daily rate and then add the interest monthly. If a credit card advertises its interest rate as 8% p.a., the daily rate is %. To work out the interest, you will need to count the number of days that the credit card has each different balance over the month. An extract from a credit card statement is shown below. Interest rate = 5% p.a. Daily rate = % Date Credit Debit Balance June \$900 0 June \$400 repayment \$500 5 June \$50 purchase \$850 June \$40 purchase \$990 July??? interest Calculate the interest that will be due for the month of June. THINK 4 5 WORKED Example For June 9 June inclusive (9 days), the balance owing is \$900. Calculate the interest. For 0 June 4 June inclusive (5 days), the balance owing is \$500. Calculate the interest. For 5 June June inclusive (7 days), the balance owing is \$850. Calculate the interest. For June 0 June inclusive (9 days), the balance owing is \$990. Calculate the interest. Add each amount of interest to calculate the total interest for the month. WRITE I = % of \$900 9 I = \$. I = % of \$500 5 I = \$.0 I = % of \$850 7 I = \$.45 I = % of \$990 9 I = \$.66 Total interest = \$. + \$.0 Total interest = + \$.45 + \$.66 Total interest = \$0.47

24 4 Maths Quest General Mathematics HSC Course Graphics Calculator tip! Calculating interest on a daily basis When doing this type of question where we need to consider interest calculated on a daily basis the TVM mode of your calculator is very useful. Consider the method shown below for worked example.. From the MENU of your calculator select TVM.. Press F to select Simple Interest.. For 9 days the balance is \$900, so enter: n = 9 I% = 5 PV = Press F (SI) to get the interest for these 9 days. 5. For 5 days the balance is \$500. Press EXIT to return to the previous screen; change the values of n and PV. Interest = \$. n = 5 I% = 5 PV = 500 Interest = \$.0 Then press F for the simple interest. 6. For 7 days the balance is \$850. Press EXIT to return to the previous screen; change the values of n and PV. n = 7 I% = 5 PV = 850 Interest = \$.45 Then again press F for the simple interest.

25 Chapter Credit and borrowing 5 7. For 9 days the balance is \$990. Press EXIT to return to the previous screen; change the values of n and PV. n = 9 I% = 5 PV = 990 Interest = \$.66 Then again press F for the simple interest. 8. Add each amount of interest to find the total Total interest amount of interest for the month. = \$. + \$.0 + \$.45 + \$.66 = \$0.47 When deciding which credit card is most suitable for your needs, consider if you will generally be able to pay most items off before the interest-free period expires. The total cost in interest over a year will vary according to the repayment pattern. WORKED Example 4 Kerry has a credit card with an interest-free period and interest is then charged on the outstanding balance at a rate of 8% p.a. Kerry pays a \$00 bill for her council rates on her credit card. a Kerry pays \$600 by the due date. What is the outstanding balance on the card? b Calculate the interest Kerry must then pay for the second month. c An alternative credit card charges % p.a. interest with no interest-free period. Calculate the interest that Kerry would have been charged on the first month. d Calculate the balance owing after Kerry pays \$600 then calculate the interest for the second month. e Which credit card would be the cheapest to use for this bill? THINK a Subtract the repayment from the balance. b Use the simple interest formula to calculate one month s interest. c Use the simple interest formula to calculate the first month s interest. WRITE a Balance owing = \$00 \$600 Balance owing = \$600 b I = Prn = \$ = \$9.00 c I = Prn = \$00 0. = \$ d Add the interest to the amount of the bill and subtract the repayment. Use the simple interest formula to calculate the second month s interest. d Balance owing = \$00 + \$ \$600 = \$6 I = Prn = \$ = \$6. e Add the two months of interest together for the second card and compare with the interest for the first card. e The interest on the second card is \$8. and therefore the card with the interest-free period is cheaper in this case.

26 6 Maths Quest General Mathematics HSC Course remember. A credit card is a source of an instant loan to the card holder.. The card is repaid monthly with the minimum payment usually 5% of the outstanding balance, or \$0, whichever is the greater.. There are many different types of credit card. The main difference between them is that some have an interest-free period while others charge interest from the date of purchase. 4. Cards without an interest-free period generally have a lower rate of interest than those with an interest-free period. 5. The interest on a credit card is usually calculated as a daily rate. This is found by dividing the annual rate by The TVM function on the graphics calculator can be used to calculate the monthly interest on a credit card. 7. To calculate the cheaper credit card, we need to consider the repayment plan that would be used. D Credit cards WORKED Example WORKED Example Roy has a credit card with an outstanding balance of \$70. Calculate the minimum payment if he must pay 5% of the balance, or \$0, whichever is greater. The minimum monthly repayment on a credit card is 5% of the balance, or \$0, whichever is greater. Calculate the minimum monthly repayment on a balance of: a \$500 b \$94.50 c \$49.76 d \$50 e \$90.5. Leonie has a credit card with an outstanding balance of \$850. If the interest rate is 8% p.a., calculate the amount of interest that Leonie will be charged for one month if the balance is not paid by the due date. 4 Hassim buys a refrigerator for \$450 with his credit card. The card has no interest-free period and interest is charged at a rate of 5% p.a. Calculate one month s interest on this purchase. 5 Michelle has a \$000 outstanding balance on her credit card. The interest rate charged is % p.a. on the balance unpaid by the due date. a If Michelle pays \$00 by the due date, calculate the balance owing. b Calculate the interest that Michelle will owe for the next month. c What will be the balance owing on Michelle s next credit card statement? d What will be the total amount owing on the credit card after another month s interest is added? 6 Chandra has a credit card which charges interest at a rate of % p.a. but has no interest-free period. He makes a purchase of \$750 on the credit card. a After one month Chandra s credit card statement arrives. What will be the outstanding balance on the statement? b The minimum repayment will be 5% of the outstanding balance. Calculate the amount that Chandra will owe if he makes only the minimum payment. c In the next month Chandra makes purchases totalling \$47.0. Calculate the interest charged and the balance owing for the next month s statement.

27 Chapter Credit and borrowing 7 WORKED Example 7 An extract of a credit card statement is shown below. Take year = 65.5 days. Interest rate = 8% p.a. Daily rate = % Date Credit (\$) Debit (\$) Balance (\$) July July 40 purchase 0 July 40 repayment August??? interest a Complete the balance column. Calculate the balance owing on 0 July and 0 July. b Calculate the interest due on August and the balance on that date. 8 Study the credit card statement below. Interest rate = 6.5% p.a. Daily rate = Date Credit (\$) Debit (\$) Balance (\$) Jan Jan. 500 repayment 5 Jan. 99 purchase Feb.??? interest 8 Feb.??? repayment March??? interest a Calculate the daily rate of interest, correct to 4 decimal places (take year = 65.5 days). b Calculate the interest added to the account on February. c On 8 February the minimum repayment of 5% is made. Calculate the amount of this repayment. d Calculate the outstanding balance on the account on March. WORKED Example 4 9 Kai has two credit cards. One has an interest-free period and interest is then charged on the outstanding balance at a rate of 8% p.a. The other has no interest-free period with interest added from the date of purchase at a rate of 4% p.a. Kai has \$500 worth of bills to pay in the coming month and intends to use one of the cards to pay them, then pay the balance off in monthly instalments of \$500. a If Kai uses the card with the interest-free period and pays \$500 by the due date, what is the outstanding balance on the card? b Calculate the interest Kai must then pay for the second month. c Calculate the balance owing at the end of the second month and the balance owing at the end of the third month, at which time Kai pays off the entire balance. d Calculate the interest payable in the first month if Kai uses the card without the interest-free period. e Calculate the balance owing after Kai pays \$500 then calculate the interest for the second month. f Calculate the balance owing at the end of the second month and the balance owing at the end of the third month, at which time Kai pays off the entire balance. g Which card should Kai use for these bills?

28 8 Maths Quest General Mathematics HSC Course Researching credit cards Find out about the costs associated with two credit cards. One of the cards should have an interest-free period and the other no interest-free period. Find out: if there is an annual fee associated with having the card the interest rate on each card the minimum monthly payment to be made on each card 4 what credit limits apply to a first-time credit card holder 5 what benefits such as Fly-Buys or Frequent Flyer Points can be obtained from use of the card 6 any other relevant information about the card. Calculate the amount of flat rate interest payable on a loan of \$4500 at % p.a. over a year term. A loan of \$000 is repaid over year at a rate of \$00 per week. Calculate the rate of interest charged on the loan. A loan of \$0 000 at % p.a. reducible over 0 years is repaid at \$8.6 per month. The bank also charges an \$8 per month account management fee. Calculate the total cost of repaying the loan. 4 A loan of \$5000 is advertised at a rate of 9% p.a. flat rate interest for a term of ( + r) 4 years. Use the formula E n = to calculate the effective rate of interest on n this loan (correct to decimal place). 5 A loan of \$0 000 at % p.a. reducible interest is repaid over 4 years at a rate of \$58.46 per month. Calculate the equivalent flat rate of interest charged on the loan (correct to decimal place). 6 With reference to credit cards, what is meant by the term interest-free period? 7 The minimum repayment on a credit card is 5% or \$0, whichever is greater. Calculate the minimum repayment for July that is to be made on a card with an outstanding balance of \$ On the credit card in question 7, a repayment of \$500 is made by the due date. Calculate the interest that will be charged for August at the rate of 8% p.a. 9 An alternative credit card with no interest-free period has an interest rate of % p.a. Calculate the interest on the above credit card for July at this rate. 0 Calculate the total interest that would have been charged for months assuming a \$500 payment was made on August.

29 Chapter Credit and borrowing 9 Loan repayments With a reducing balance loan, an amount of interest is added to the principal each month and then a repayment is made which is then subtracted from the outstanding balance. Consider the case below of a \$000 loan at 5% p.a. to be repaid over year in equal monthly instalments of \$80.5. Month Opening balance Interest Closing balance \$ \$5.00 \$ \$ \$.06 \$687.0 \$687.0 \$.09 \$ \$57.59 \$9.09 \$ \$66.7 \$7.08 \$0.7 6 \$0.7 \$5.0 \$ \$07.5 \$.97 \$ \$ \$0.87 \$ \$ \$ 8.75 \$ \$ 58.9 \$ 6.60 \$ 54.7 \$ 54.7 \$ 4.4 \$ 78.9 \$ 78.9 \$. \$ 0.00 The actual calculation of the amount to be repaid each month to pay off the loan plus interest in the given period of time is beyond this course. The most practical way to find the amount of each monthly repayment is to use a table of repayments.

30 0 Maths Quest General Mathematics HSC Course Monthly repayment per \$000 borrowed Interest rate Year 5% 6% 7% 8% 9% 0% % % % 4% 5% \$85.6 \$86.07 \$86.5 \$86.99 \$87.45 \$87.9 \$88.8 \$88.85 \$89. \$89.79 \$90.6 \$4.87 \$44. \$44.77 \$45. \$45.68 \$46.4 \$46.6 \$47.07 \$47.54 \$48.0 \$48.49 \$9.97 \$0.4 \$0.88 \$.4 \$.80 \$.7 \$.74 \$. \$.69 \$4.8 \$ \$.0 \$.49 \$.95 \$4.4 \$4.89 \$5.6 \$5.85 \$6. \$6.8 \$7. \$7.8 5 \$8.87 \$9. \$9.80 \$0.8 \$0.76 \$.5 \$.74 \$.4 \$.75 \$.7 \$.79 6 \$6.0 \$6.57 \$7.05 \$7.5 \$8.0 \$8.5 \$9.0 \$9.55 \$0.07 \$0.6 \$.5 7 \$4. \$4.6 \$5.09 \$5.59 \$6.09 \$6.60 \$7. \$7.65 \$8.9 \$8.74 \$9.0 8 \$.66 \$.4 \$.6 \$4.4 \$4.65 \$5.7 \$5.7 \$6.5 \$6.8 \$7.7 \$ \$.5 \$.0 \$.5 \$.0 \$.54 \$4.08 \$4.6 \$5.8 \$5.75 \$6. \$6.9 0 \$0.6 \$.0 \$.6 \$. \$.67 \$. \$.78 \$4.5 \$4.9 \$5.5 \$6. \$ 9.86 \$0.7 \$0.88 \$.4 \$.96 \$.5 \$.09 \$.68 \$4.8 \$4.89 \$5.5 \$ 9.5 \$ 9.76 \$0.8 \$0.8 \$.8 \$.95 \$.54 \$. \$.75 \$4.7 \$5.0 \$ 8.7 \$ 9.5 \$ 9.78 \$0. \$0.90 \$.48 \$.08 \$.69 \$. \$.95 \$ \$ 8.9 \$ 8.8 \$ 9.5 \$ 9.9 \$0.49 \$.08 \$.69 \$. \$.95 \$.60 \$4.7 5 \$ 7.9 \$ 8.44 \$ 8.99 \$ 9.56 \$0.4 \$0.75 \$.7 \$.00 \$.65 \$. \$ \$ 7.58 \$ 8. \$ 8.67 \$ 9.5 \$ 9.85 \$0.46 \$.09 \$.74 \$.40 \$.08 \$.77 7 \$ 7.9 \$ 7.8 \$ 8.40 \$ 8.98 \$ 9.59 \$0. \$0.85 \$.5 \$.9 \$.87 \$.58 8 \$ 7.0 \$ 7.58 \$ 8.6 \$ 8.75 \$ 9.6 \$0.00 \$0.65 \$. \$.00 \$.70 \$.4 9 \$ 6.80 \$ 7.6 \$ 7.94 \$ 8.55 \$ 9.7 \$ 9.8 \$0.47 \$.5 \$.85 \$.56 \$.8 0 \$ 6.60 \$ 7.6 \$ 7.75 \$ 8.6 \$ 9.00 \$ 9.65 \$0. \$.0 \$.7 \$.44 \$.7 \$ 6.4 \$ 6.99 \$ 7.58 \$ 8.0 \$ 8.85 \$ 9.5 \$0.9 \$0.89 \$.60 \$. \$.07 \$ 6.5 \$ 6.8 \$ 7.4 \$ 8.06 \$ 8.7 \$ 9.8 \$0.07 \$0.78 \$.50 \$.4 \$.99 \$ 6.0 \$ 6.69 \$ 7.0 \$ 7.9 \$ 8.59 \$ 9.7 \$ 9.97 \$0.69 \$.4 \$.6 \$.9 4 \$ 5.97 \$ 6.56 \$ 7.8 \$ 7.8 \$ 8.49 \$ 9.7 \$ 9.88 \$0.60 \$.4 \$.0 \$.86 5 \$ 5.85 \$ 6.44 \$ 7.07 \$ 7.7 \$ 8.9 \$ 9.09 \$ 9.80 \$0.5 \$.8 \$.04 \$.8 The table shows the monthly repayment on a \$000 loan at various interest rates over various terms. To calculate the repayment on a loan, we simply multiply the repayment on \$000 by the number of thousands of dollars of the loan.

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