12 FURTHER

MATHEMATICS
Modelling and analysing reducing-balance loans and annuities
 Analysing reducing-balance loans with recurrence relations

Recurrence relations were used to model financial situations with linear and geometric growth and decay. These
included simple and compound interest and the depreciation of assets. Recurrence relations can be used to model
situations that involve elements of both linear and geometric growth.
Analysing reducing-balance loans with recurrence relations
 Analysing reducing-balance loans with recurrence relations

Reducing-balance loans
When money is borrowed from a bank, it is very unusual for the borrower to wait until the term of the loan is complete
before paying all of the money owed, including the interest, back to the bank.

Generally loans are repaid by making regular payments to reduce the amount owed, the balance of the loan, to zero over
time. The amount originally borrowed is called the principal of the loan.
This kind of loan is called a reducing-balance loan.

A reducing-balance loan is effectively a compound interest loan, with regular payments. Personal loans and mortgages
(home loans) are examples of reducing-balance loans.
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
Analysing reducing-balance loans with recurrence relations
WORK TO BE
COMPLETED
Exercise 9A All and 9B Odd Numbered Questions