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QUESTION 1: (4 marks)

A $10,000 investment attracts interest of 10% p.a. compounded quarterly over a 10-year
period. How much interest will have accrued at the end of the 10-year period?

Solution:

S = P( 1 + i )n

P = $10,000
I = 0.1/4 = 0.025(2.5% per quarter)
N = 10 x 4 = 40

S = 10,000(1 + 0.025)40
S = 10,000 x 2.685063838
= $26,850.64

Therefore, the Interest that will Accrued at the end of 10 years is calculated as;

= Accumulated Value (s) - Principal (P)


= $26,850.64 - $10,000
= $16,850-64

Thus, Interest Accrued at the end of 10 yrs is $16,850.64

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QUESTION 2: (8 marks)
Peter deposited $5,000 on 1st January 1989 with ANZ Bank, receiving interest of 8% p.a.
compounded quarterly. On 1st January 1991, the bank informed him that interest rates were
increased to 9% p.a. How much should Peter expect to receive in interest on 1st January
1994?

Solution:

(i), 1989 – 1990 (2yrs) therefore, Interest on 1st January 1994


Peter should expect is;
S = P(1 + i)n
= Accumulated Value (S) – Principal (P)
P = $5,000 = $7586.67 – $5000
I = 0.08/4 = 0.02 = $2,586.67
N =2x4 = 8

S = 5,000(1 + 0.02)8 OR
= 5000 x 1.17165381
= $5858.30
= $5858.30 - $5000 $858.30 + $1728.37 = $2,586.67
= $858.30

(ii), 1991 – 1993 (3yrs)

S = P(1 + i)n

P = 5858.30
I = 0.09
N=3

S = 5858.30(1 + 0.09)3
= 5858.30 x 1.295029
= $7,586.67
= $7586,67 –$ 5858.30
= $1728.37

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QUESTION 3: (8 marks)
Two SINU Accounting Students, Israel and Attex had $8,000 and $9,000 respectively in their
saving accounts. Israel deposited his funds in a fixed-term deposit account with Bank South
Pacific, attracting 12% p.a. interest compounded quarterly while Attex found a return of 16%
p.a. compounded quarterly from POB. After 3 years, which is upon completion of their
studies, they decided to pool their resources and become partners in a printing business.
They approached ANZ Bank who offers 12% interest p.a. compounded monthly and make
the deposit for 5 years. How much did Israel and Attex have in total at the end of the 8-year
period?

Solution:

(i) Israel; (iii) Both became partner


S = P(1 + i)n S = P(1 + i)n
(a) 1st 5yrs
P = $8000 P = $25,815.40($11,406.10 + $14,409.30)
I = .12/4 = 0.03 i = .12/12 = 0.01
N = 3 x 4 = 12 n = 12 x 5 = 60

= 8000(1 + 0.03)12 S = 25815.40(1 + 0.01)60


= 8000 x 1.425760887 = 25815.40 x 1.816696699
= $11,406.10 = $46,898.75

(ii) Attex;
S = P(1 + i)n
P = $9000
I = 0.16/4 = 0.04 Therefore, Israel & Attex will have
N = 4 x 3 = 12 $46,898.75 in total at the end of 8-
years.
= 9000(1 + 0.04)12
= 9000 x 1.601032219
= $14,409.30

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QUESTION 4: (8 marks)
Brianden deposited $1,000 at the end of each year for 10 years in an account earning 12%
p.a. interest compounded annually. At the end of the 10-year period, he was offered a
scholarship to pursue his MA in UK. If he decided to leave the funds in the account for
another 5 years after the last deposit and while he is away on studies, how much would he
receive when he return from his studies?

Solution:

(i) 1st 10yrs therefore, Brianden should received $30,926.88


When he return from his studies after 5 yrs.
S = R (1 + i)n - 1
i

R = $1000
I = 0.12
N = 10

= 1000(1 + 0.12)10 -1
0.12

=1000 * (17.54873507)
= $17,548.74

(i) Another 5yrs

S = P(1 +i)n

P = 17,548.74
i = .12
n=5

= 17548.74(1 + 0.12)5
= 17548.74 x 1.762341683
= $30,926.88

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QUESTION 5: (5 marks)
Bank South Pacific advertises a house for $135,000 and repayments of $1,340.50 per month
over 25 years at an interest rate of 13.5% p.a. compounded monthly. What is the equivalent
cash price of the house?

Solution:

A = R (1 – (1 + i)-n
I

R = 1,340.50
i = 0.135/12 = 0.01125
n = 12 x 25 = 300

= 1345.50(1 – (1 + 0.01125)-300
0.0125

= 1340.50(1 – 0.034869009)
0.01125

= 1340.50 (0.965130991)
0.01125

= 1340.50 x 85.78942142
=$115,000.72

Therefore; the equivalent cash price of the house is;

= Advertised value of the house + Present value


= $135,000 + $115,000.72
= $250,000.72

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QUESTION 6: (7 marks)
A local farmer wish to borrow $35,000 from a local lending business at an interest rate of
11.5% p.a. compounded monthly. The farmer, who is your uncle approached you and asked
for your advice as he is unsure whether his loan should be for a duration of 15 years or 20
years.
(a) Give an advice to the old man, clearly indicating which of the two proposed terms is
considered beneficial and the reason(s) for your answer.
Solution;
(i) 15 years (ii) 20yrs
A = R(1- (1 +i)-n A = R(1 – (1 + i)-n
i i
A = $35000 35000 = R(1 – (1 + 0.009583)-(20x12)=240
R = unknown 0.009583
I = .115/12 = 0.009583 35000 = R(1 – 0.101370836)
N = 15 x 12 = 180 0.009583
35000 = R (93.7732614)
35000 = R(1 – (1 + 0.009583)-180 93.7732614 93.7732614
0.009583
R =$373.24 ; thus, 373.24x240 =$89,577.60(after 20yrs

35000 = R(1 – 0.179653124)


0.009583
35000 = R (0.820346876)
0.009583
35000 = R (85.60439069)
85.60439069 85.60439069
R = $408.86
thus, $408.86 x 180 = $73,594.80(total repayment after 15yrs)

Advice;
Now, upon the above calculations, you should be agree with me on which one I am
preferring is much beneficial. And that is, I prefer you to consider the 15yrs. In fact the
repayment over 20 yrs will be less compared to the 15yrs. However, you will ended up
paying bigger interest. Therefore, 15yrs is beneficial because; (i), you have the ability to
quickly pay-off your loan and concentrate on other business and thus, free from
burdening you repaying loan over longer period. And since you’re old now, you need not to
work hard but enjoying freedom from repayment for lengthy period. (ii), save money on
interest. The shorter your finance term, the less you pay on interest. Therefore, choosing a
15yrs loan over a 20yrs loan saves you some amount of money in the long run. For instance,
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as per above calculations you will repay an extra $15,982.80(89,577.0 – 73,594.80) whilst
for 15yrs you’ll save $15,982.80. (iii), Build Equity Faster. If you loan and buy for a valuable
property such as house, car..etc. then this is important. The difference between your house’s
value for example, and what you owe your home loan lender is the equity. Home equity
builds as your property value increases and your loan balance decreases. Perhaps, equity
builds slowly with a 20-year loan because it takes longer to pay down the principal balance.
However, since you pay less interest on a 15-year loan you can build equity at a faster rate.

(b) If the old man decides to take the loan over a 15-year period, what would be the balance
after 5 years?

Solution:

A = R(1- (1 + i)-n
i
R = $408.86(repayment for 15yrs)
I = 0.009585
N = 120(12x10) – the remaining 10yrs after 5yrs of repayments

= $408.86 (1- (1 + 0.009583)-120


0.009583
= $408.86(1 – 0.318387871)
0.009583

= $408.86(0.681612129)
0.009583
= $408.86 x 71.12721789

= $29,081.10

Therefore the balance after 5yrs of repayment would be $29,081.10(round


to the nearest cent)

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