FINANCE

Notes courtesy of Mrs J Giangregorio

Revision: Grade 10 & 11
Simple and Compound interest:
(1) Tommy invests R120 000 into the bank, at 9% p.a. simple interest for 12 years.
(a) How much money will he have at the end?
(b) What is the total interest earned?
Remember: Simple Interest = Interest is calculated only on the total amount invested or borrowed.
(a) 𝐴 = 𝑃(1 + 𝑖. 𝑛) (b) Interest = Accumulated – Principal
𝑃= 𝐴=
𝑖= 𝐴=
𝑛=
𝐴=

(2) Lucy invests R120 000 into the bank, at 9% p.a. compounded annually for 12 years.
(a) How much money will she have at the end?
(b) What is the total interest earned?
Remember: Compound Interest: Interest is calculated both on the total amount
borrowed/invested AND on any interest that has accumulated in previous time periods.
(a) 𝐴 = 𝑃(1 + 𝑖)𝑛 (b) Interest = Accumulated – Principal
𝑃= 𝐴=
𝑖= 𝐴=
𝑛=
𝐴=

(3) Jennie invests R120 000 into the bank, at 9% p.a. compounded monthly for 12 years.
(a) How much money will she have at the end?
(b) What is the total interest earned?
Remember: Compounded monthly means that the interest rate must be divided by 12 and
the term of the investment must be multiplied by 12
𝑖 𝑚×𝑛
𝐴 = 𝑃 (1 + 𝑚)

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 (a) 𝐴 = 𝑃(1 + 𝑖)𝑛 (b) Interest = Accumulated – Principal
𝑃= 𝐴=
𝑖= 𝐴=
𝑛=
𝐴=

NOTES:
(1) If you invest using simple interest, you earn much less interest than if you invest using
compound interest (if the period of time is the same).
(2) The more often the interest is added, the larger the investment is at the end. i.e. 9% p.a.
compounded monthly yields a greater return than 9% p.a. compounded annually.
Terminology Time frame Interest rate Time period
Semi-annually or Every 6 months 𝑖 𝑛 ×2
2
bi-annually
Quarterly Every 3 months 𝑖 𝑛 ×4
4
Monthly Every month 𝑖 𝑛 × 12
12
Daily Every day 𝑖 𝑛 × 365
365
Nominal and effective interest rates:
The effective interest rate is higher than the nominal interest rate.
𝑖(𝑒) = effective annual interest rate
𝑖(𝑛) = nominal interest rate, per annum, compounded 𝑚 times in one year.

(1) Tommy invests R120 000 into the bank, with an effective annual interest rate 9% p.a. for 12
years.
(a) Convert effective rate into nominal rate compounded quarterly
𝑖(𝑛) 𝑚
1 + 𝑖(𝑒) = (1 + ) NB: Learn this formula – it is not on the formula sheet
𝑚

𝑖(𝑛) 4
1 + 0,09 = (1 + )
4

1,09 =

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(2) Jennie invests R120 000 into the bank, at 9% p.a. compounded monthly for 12 years.
(a) Convert this nominal rate into an effective rate
𝑖(𝑛) 𝑚
1 + 𝑖(𝑒) = (1 + ) NB: Learn this formula – it is not on the formula sheet
𝑚

0,09 12
1 + 𝑖(𝑒) = (1 + )
12
1 + 𝑖(𝑒) =

Depreciation:
This is the loss in value of an asset over time.
The loss can be on a straight-line basis or a reducing-balance basis.
(1) Tommy buys a car for R860 000. Calculate the value of the car at the end of 6 years if
depreciation is calculated at 14% p.a. on a straight-line basis. Remember:
• Depreciation is the same every year.
• It is a percentage of the original value of the asset.
• The value of the asset is reduced to 0.
𝐴 = 𝑃(1 – 𝑖. 𝑛)
𝑃 = 𝐴=
𝑖 = 𝐴=
𝑛 =
𝐴 = NB: The accumulated amount must be LESS than the principle amount.

(2) Jennie buys a car for R860 000. Calculate the value of the car at the end of 6 years if
depreciation is calculated at 14% p.a. on a reducing-balance basis. Remember:
• Depreciation is based on the previous year’s value.
• Each year, the depreciation is a % of the reduced value of the asset.
• The loss in value will become less each year.
• The asset will always have some value at the end.
• The final value is larger than for the straight-line basis, but still LESS than the
principle amount.
𝐴 = 𝑃(1 – 𝑖)𝑛
𝑃 =
𝑖 =
𝑛=
𝐴 =
NB: The accumulated amount must be LESS than the principle amount.

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Exercise:
(1) R8 000 is invested in a savings account at an interest rate of 6% p.a. compounded monthly.
Two years later, R14 000 is added to the savings. Calculate how much money is in the
savings account six years after the first amount was invested.

(2) Peter wins R300 000 in the lottery and invests the money with SA Best Bank. The bank pays
interest at 6% p.a. compounded monthly. After two years, Peter withdraws R120 000 to buy a
car but one year later he deposits R50 000 into his bank savings. Calculate how much
money he has in the bank savings account at the end of the five years.

(3) R2 500 is deposited into a savings account. The interest for the first two years is calculated
at 6,5% p.a. compounded annually, and then the interest is increased to 7% p.a.
compounded quarterly. Calculate how much money will be in the savings account after six
years.

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 Revision: Grade 11
(1) A computer is purchased for R16 000. It depreciates at 15% per annum.
(1.1) Determine the book value of the computer after 3 years if depreciation is calculated
according to the straight-line method. [3]
(1.2) Find the rate, according to the reducing balance method, that would yield the same
book value as in (1.1) after 3 years. [5]

(2) Peter invests R12 500 for 5 years at 12% per annum compounded monthly for the first 2
years and 14% per annum compounded semi-annually for the next 3 years. How much will
Peter receive in total after 5 years? [4]

(3) Thanda invests R120 000. He is quoted a nominal interest rate of 7,2% p.a. compounded
monthly.
(3.1) Calculate the effective rate per annum, correct to three decimal places. [4]
(3.2) Use the effective rate to calculate the value of Thanda’s investment if he invested the
money for 3 years. [3]
(3.3) Suppose Thanda invests his money for a total period of 4 years, but after 18 months
makes a withdrawal of R20 000, how much will he receive at the end of 4 years? [5]

(4) The value of furniture depreciates annually on a straight-line basis by 12% of the value it
had at the beginning of the year. The furniture originally costs R6 800.
(4.1) Calculate the book value after 5 years. [4]
(4.2) By how much did the value of the furniture decrease? [1]

(5.1) The nominal yearly rate of interest is 13, 46 %. Calculate the effective yearly rate if
interest is compounded daily. [4]
(5.2) Convert the effective interest rate of 18 % p.a. compounded monthly into a nominal
interest rate. [4]

(6) Petru deposited R14 000 into her saving account and 2 years later another R4 000 was
deposited into the same account. The interest rate for the first 3 years was 9,6% p.a.
compounded annually and then 7,2% p.a. compounded half yearly for the next 4 years.
How much will she have in her account at the end of 7 years? [9]

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(7) Examination Aid wants to buy a computer and a fax machine for R18 500 on a Hire
Purchase agreement over 3 years. The interest charged is 16,8% p.a.
(7.1) What type of interest is charged on a hire purchase agreement? [1]
(7.2) Calculate the total amount that must be repaid. [3]
(7.3) Determine the monthly repayments. [2]
(8) Mr Turner purchased a new car for his wife. The bank offered him a loan at a nominal rate
of 17% p.a. compounded monthly.
(8.1) What was the effective interest rate that he was required to pay? (2 d.p.) [3]
(8.2) The value of the car is depreciating at 16% p.a. on a straight-line basis. After 4 years,
its value is R35 640. Calculate the original cost of the car. [4]

(9) Mr Jones deposits R8 000 into a savings account and 3 years later he deposits another
R12 000. The interest rate is 12% p.a. compounded quarterly for the first 2 years, then
10,5% p.a. compounded monthly. The money is left in the account for 6 years. Calculate
how much Mr Jones will have in the account at the end of 6 years. [6]

(10) After 4 years of reducing balance depreciation, an asset has a quarter of its original value.
The original value was R86 000. Calculate the depreciation interest rate as a percentage,
correct to 1 decimal place. [5]

(11) Jabu invests a certain sum of money for 5 years. She receives interest of 12% p.a.
compounded monthly for the first 2 years. The interest rate changes to 14% p.a.
compounded semi-annually for the remaining term. The money grows to R75 000 at the
end of the 5-year period.
(11.1) Calculate the effective interest rate per annum during the first year. [4]
(11.2) Calculate how much money Jabu invested initially. [6]

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Calculation of the time period (n)
(1) Tom invests R3 000 at 8% p.a. compounded annually. How long will it take for the
investment to double? Hint: The accumulated amount will be 2 x R3 000.
𝐴 = 𝑃 (1 + 𝑖)𝑛
𝑃 =
𝑖 =
𝑛 =
𝐴 =

(2) Polly invests R3 000 at 8% p.a. compounded quarterly. How long will it take for the
investment to double?
𝐴 = 𝑃 (1 + 𝑖)𝑛
𝑃 =
𝑖 =
𝑛 =
𝐴 =

(3) Bobby bought a car for R150 000. It depreciates at 9% p.a. on the reducing-balance
method. How long would it take for the car to depreciate to R60 000?
𝐴 = 𝑃 (1 + 𝑖)𝑛
𝑃 =
𝑖 =
𝑛 =
𝐴 =

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Exercise:
(1) Marietjie invested R36 000 in an account that paid her 7,5% p.a. interest compounded
annually. After how many years was the amount in her savings account R48 076,89?

(2) How long will it take for an investment to treble if the interest rate is 14% p.a. compounded
daily? Give your answer in years and months.

(3) Thami dreamed of becoming a millionaire and travelling to New York. When he was 30
years old, he invested R200 000 with an investment company. If the interest rate was 8,5%
p.a. compounded monthly, how old was he when he achieved his dream? Give your answer
correct to the nearest year.
(4) Preven invested R75 000 at 9,2% p.a. compounded quarterly. After how long will this
investment be worth R113 000? Give your answers in years and months.

(5) How long will it take for an investment to double if the interest rate is 11,5% p.a.
compounded annually? Give answers in years and months.

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 ANNUITIES
An annuity is a series of equal payments, at regular intervals, subject to a rate of interest.
(1) FUTURE VALUE ANNUITIES
In a future value annuity, money is invested at regular intervals, in order to save money for the
FUTURE. Compound interest is paid on the money deposited into the fund.

T0 T1 T2 T3 Tn-1 Tn
x x x x x x

x = payment each month

𝑥[(1+𝑖)𝑛 −1]
𝐹=
𝑖

Examples:
(1) Tom opens a savings account. On opening the account, he immediately deposits R1 000
into the account, and continues to make monthly payments at the end of each month, for a
period of 8 years. The interest rate is 24% p.a. compounded monthly.
(a) How much money has Tom accumulated at the end of the 8th year?
(b) At the end of the 8-year period, he leaves the money in the account for another year,
without making any more deposits. How much money will he now have?

(2) Polly is 25. She wishes to accumulate R10 000 000 by her 50th birthday. She will pay equal
monthly payments into an account, paying 15% p.a. compounded monthly. Payments start
on her 25th birthday and end on her 50th birthday. What is her monthly payment?

(3) R5 000 is invested each month, starting in one month’s time, into an account paying 18%
p.a. compounded monthly. How long will it take to accumulate R300 000?

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Exercise:
(1) Thabo decides to save money for 10 years in a Unit Trust Fund. He immediately deposits
R800 into a savings account. Thereafter, at the end of each month, he deposits R800 into
the fund and continues to do this for the ten-year period. Interest is 15% p.a. compounded
monthly. Calculate the final value of this investment.

(2) Suzie starts saving for a car. On her 16th birthday, she deposits R5 000 into a bank account
with an interest rate of 18% p.a. compounded quarterly. She continues to make quarterly
payments until the last payment on her 24th birthday. How much money will she have then
at her disposal to finance the purchase of a new car?

(3) Piet decides to invest money into the share market in order to become a millionaire in 10
years’ time. He believes that he can average a return of 25% p.a. compounded monthly. In
one month’s time, he wishes to start making monthly payments into an account. How much
must he invest per month in order to obtain his R1 000 000?

(4) Poppy wants to save up R250 000 in 5 years’ time in order to buy a car. She starts making
monthly payments into an account paying 13% p.a. compounded monthly, starting
immediately. How much will she pay each month?

(5) R500 is invested each month, starting in one month’s time, into an account paying 16% p.a.
compounded monthly. How long will it take to accumulate R10 000?

(6) R2 000 is invested every 6 months, starting in 6 months’ time, into an account paying 16%
p.a. compounded semi-annually. How long will it take to accumulate R100 000?

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 (2) PRESENT VALUE ANNUITIES
A sum of money is borrowed from a bank and is paid back, with interest, by means of regular
payments at equal intervals over a time period.
E.g. bond repayments, loans, car repayments

FUTURE VALUE: Starts with R0 and ends with an amount

PRESENT VALUE: Starts with an amount and ends with R0.

There must be a gap between the loan and the first payment – you do not borrow money and
make a payment immediately!!

𝑥[1−(1+𝑖)−𝑛 ]
𝑃=
𝑖

Examples:
(1) Bob requires a loan to buy equipment. He can afford to pay R2 000 per month, starting one
month after granting the loan. Payments will continue for 10 months, at an interest rate of
24% p.a. compounded monthly. How much can Bob borrow?

(2) How much can Peter borrow if he agrees to repay a loan by means of quarterly payments of
R7 000, starting in 3 months from now? The payments will continue for 3 years, and the
rate is 16% p.a. compounded quarterly.

(3) How much money must Thato win in the Lottery, so as to receive equal monthly payments
of R15 000 per month for a period of 10 years, starting one month after winning the money?
Interest rate = 15% p.a. compounded monthly.

(4) A loan of R300 000 is to be repaid by means of monthly payments of R5 000, starting one
month after the granting of the loan. Interest is 18% p.a. compounded monthly. How long
will it take to repay the loan?

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Exercise:
(1) How much can be borrowed from a bank if the borrower repays the loan by means of equal
quarterly payments of R2 000, starting in 3 month’s time? Interest rate = 18% p.a.
compounded quarterly for 10 years.

(2) How much can be borrowed from a bank if the borrower repays the loan by means of equal
payments of R2 000, starting in 3 month’s time? Interest rate = 18% p.a. compounded
quarterly for 10 years.

(3) Twenty-five semi-annual payments are made, starting 6 months from now, in order to repay
a loan of R100 000. What is the value of each payment if interest is 18, 6% p.a.
compounded semiannually?

(4) What amount must be invested now in order for the investor to receive equal payments of
R2 000 per month from the bank for 3 years, starting in one month’s time? Interest = 18%
p.a. compounded monthly.

(5) Solly inherits R1 000 000. He invests the money at an interest rate of 14% p.a.
compounded monthly. He wishes to earn a monthly salary from the investment for a period
of 20 years, starting 1 month from now. How much will he receive each month?

(6) Danny takes out a retirement annuity that will supplement his pension, when he retires, 30
years from now. He estimates that he will need R2,5 million in the retirement fund at that
stage. The interest rate he earns is 9% p.a. compounded monthly.
(a) Calculate his monthly payment into this fund if he starts paying immediately and
makes his final payment in 30 years’ time.

(b) The retirement fund does not pay out the R2,5 million when Danny retires. Instead,
he will be paid monthly amounts, for a period of 20 years, starting 1 month after his
retirement. If the interest rate that he earns over this period is calculated at 7% p.a.
compounded monthly, determine the monthly payments he will receive.

(7) Rose makes an investment of R4 million, in a bank, earning 6% p.a. compounded monthly.
She wants to withdraw a certain amount of money, monthly, starting 1 month after making
the deposit. How many withdrawals could she make if she withdraws
(a) R30 000 p.m.
(b) R20 000 p.m.
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 SINKING FUNDS (Future Value Annuity)
Example:
A school purchases a photocopying machine for R150 000. It depreciates in value at 22% p.a. on
a reducing balance. The school wants to buy a new machine in 5 years time. A new machine will
cost more in the future and its cost will escalate at 19% p.a. effective. The old one will be sold at
scrap value after 5 years. A sinking fund is set up to save for the new machine. The proceeds from
the sale of the old machine will be used together with the sinking fund to buy the new machine.
The school will pay equal monthly amounts into the sinking fund and the interest earned is 14,4%
p.a. compounded monthly. The first payment will be made immediately, and the last payment will
be made at the end of the 5-year period.
(a) Find the scrap value of the old machine.
(b) Find the cost of the new machine 5 years from now.
(c) Find the amount required in the sinking fund 5 years from now.
(d) Find the equal monthly payments made into the sinking fund.

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Exercise:
(1) A printing press is bought for R140 000. The cost of a new press is expected to rise by 18%
p.a. while the rate of depreciation is 20% p.a. on the reducing-balance. The life span of the
press is 6 years.
(a) Find the scrap value of the old press.
(b) Find the cost of a new press in 6 years’ time.
(c) Find the value of the sinking fund that will be required to purchase the new press in 6
years time, if the proceeds from the sale of the old press will be used.
(d) The company sets up a sinking fund to pay for the new press. Payments are to be
made into an account paying 13,2% p.a. compounded monthly. Find the monthly
payments, if they are to commence 1 month after the purchase of the old press and
stop at the end of the 6-year period.

(2) A company bought a large machine for R227 851. It depreciates at 23% p.a. on a reducing
balance. A new machine will appreciate in value at a rate of 17% p.a. and will be purchased
in 5 years’ time.
(a) Find the scrap value of the old machine in 5 years time from now.
(b) Find the cost of a new machine in 5 years time from now.
(c) The company will use the money received from the sale of the old machine as part
payment for the new one. The rest of the money will come from a sinking fund that
was set up when the machine was bought. Monthly payments have been paid into a
sinking fund, starting 1 month after the purchase of the old machine, at 11,4% p.a.
compounded monthly. The payments will finish 3 months before the purchase of the
new machine. Calculate the monthly payments into the sinking fund that will provide
the money for purchasing the new machine.

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 Deferred Payments
Examples:
(1) A twenty-year loan of R100 000 is repaid by means of equal monthly payments, starting 3
months after the granting of the loan. The interest rate is 18% p.a. compounded monthly.
Calculate the monthly payments.

(2) Bob pays R3 000 at the end of each month, starting 3 months from now, into an account
paying 18% p.a. compounded monthly. He pays his final R3 000 six months before the time
he wishes to withdraw the money. If the investment period, starting from now, is 8 years,
calculate the future value of the investment at the end of the 8th year.

(3) 32 semiannual payments of R6 000 are made in order to repay a loan. The payments start
in 2 years from now. Interest is 18,6% p.a. compounded semi-annually. Find the size of the
loan.

Exercise:
(1) A loan of R120 454 is repaid by means of 14 equal monthly payments, starting 4 years after
the granting of the loan. Interest is 15% p.a. compounded monthly. Find the value of the
payments.

(2) A loan is repaid, starting in 5 years time, by means of 12 quarterly payments of R7 000. What
is the amount of the loan if the interest is 24% p.a. compounded quarterly?

(3) Tommy requires R4 500 000 in 8 years’ time. He decides to make quarterly payments,
starting in 15 months time from now. The payments continue to be made for the remaining
years. Calculate the value of each payment if interest is 24% p.a. compounded quarterly.

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 Important Tough Questions
(1) Louis buys a house and takes out a loan for R450 000 at 9,5% interest compounded
monthly.
(1.1) Calculate the monthly payments if the loan is repaid over 20 years.
(1.2) How much money does he pay over 20 years to amortize the loan?
(1.3) Calculate the balance on the loan after 8 years.

(2) Timothy buys furniture to the value of R10 000. He borrows the money on 1 February 2010
from a financial institution that charges interest at a rate of 9,5% p.a. compounded monthly.
He agrees to pay monthly installments of R450. The agreement of the loan allows him to
start paying these equal monthly installments from 1 August 2010.
(2.1) Calculate the total amount owing to the financial institution on 1 July 2010.
(2.2) How many months will it take him to pay back the loan?
(2.3) What is the balance of the loan immediately after he has made the 25th payment?

(3) Peter has just bought a tractor for R800 000. He has decided to replace the tractor in 5
years’ time, when its trade-in value will be R200 000. The replacement cost of the tractor is
expected to increase by 8% p.a.
(3.1) Peter wants to replace his present tractor with a new one in 5 years’ time. He wants
to pay cash for the new one after trading in his present tractor for R200 000. How
much will he need to pay?
(3.2) One month after purchasing his present tractor, Peter deposited x Rand into an
account that pays interest at a rate of 12% p.a. compounded monthly. He continued
to deposit the same amount at the end of each month for a total of 60 months. At the
end of 60 months he has exactly the amount that is needed to purchase a new
tractor, after he trades in his present tractor. Calculate the value of x.
(3.3) Suppose that 12 months after the purchase of the present tractor and every 12
months thereafter, he withdraws R5 000 from his account, to pay for maintenance of
the tractor. If he makes 5 such withdrawals, what will the new monthly deposit be?

(4) A car that costs R130 000 is advertised as follows:

“No deposit necessary and first payment due 3 months after date of purchase”.
The interest rate quoted is 18% p.a. compounded monthly.
(4.1) Calculate the amount owing 2 months after the purchase date, which is 1 month
before the first monthly payment is due.

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(4.2) Lily bought this car on 1 March 2009 and made her first payment on 1 June 2009.
Thereafter, she made another 53 equal payments on the first day of each month.
(4.2.1) Calculate her monthly repayments.
(4.2.2) Calculate the total of all her repayments.
(4.3) Rosie also bought a car for R130 000. She also took out a loan for R130 000 at an
interest rate of 18% p.a. compounded monthly. She also made 54 equal payments.
However, she started payments 1 month after the purchase of the car. Calculate the
total of all Rosie’s repayments.
(4.4) Calculate the difference between Lily’s and Rosie’s total repayments.

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