“You learn more from failure than from success. Don’t let it stop you.

Failure builds character” – Unknown 1

 FINANCIAL MATHEMATICS

What is financial Mathematics?

• Financial mathematics is the application of mathematical methods to financial problems.

Simple Interest

• Simple interest is the method of calculating the interest amount for a particular principal
amount (P) of money at some rate of interest(r).

𝑨 = 𝑷(𝟏 + 𝒊𝒏)

Where

A = future value / Final amount

P = Present value / initial amount / Principal Amount’
n = number of years
𝑟
r = interest rate in % and i = interest rate in decimal (𝑖 = )
100

Example 1

1. Dumisile invest R 10 000 at 6,5% p.a. simple interest. How much will she have after 8
years?

2. Ofentse plans to have a trip overseas in three years’ time. The total cost for the trip will be
R15 000. Calculate the amount of money she should invest in order to have the R15 000 in
three years’ time. If the rate is 11 % simple interest.
Exercise 1

1. R12 000 is deposited into a savings account at a bank. The interest at 10%. p.a. simple
interest. How much will have accumulated in the savings account at the end of 14 years.

2. Seven years ago, Dineo decided to invest R18 000 in a bank account that paid simple interest
at 4,5% p.a. Calculate how much money Dineo will have after 7 years.

3. An amount of R2 500 accumulates to R5 000 in 6 years. Determine the interest rate if the
investment earned simple interest.

4. An amount increases by 5% p.a. simple interest. After 7 years the final amount is R 2000.
How much money was invested?

5. How long should Snenhlanhla invest R 7 500 in order to receive R15 000. If the interest on
the investment is 12% p.a simple interest.

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 2
Compound interest.

• Compound interest is the interest on a loan or deposit calculated based on both the initial
principal amount and the accumulated interest from previous periods.

𝑨 = 𝑷(𝟏 + 𝒊)𝒏
Compound interest applications.

• Compound interest.
• Inflation
• Population growth
Example 2

1. A man invests R30 000 at 12 % per year, compounded annually. Calculate the amount he
receives after 4 years.

2. An amount increases by 5% per year, compounded annually. After 7 years the final amount
is R20 000. How much money was invested?

3. Determine at what interest rate per year, at compound interest, an amount of R500 will grow
to R960 in 6 years. If the interest is compounded annually.

Exercise 2

1. R40 000 is deposited in a savings account with an interest rate of 7% p.a, compounded
annually. Calculate the amount of money accumulated in the savings account at the end of 5
years. If the interest is compounded

2. Ellen invests a certain amount at 10,5% compound interest per annum. The interest is
compounded yearly. At the end of 6 years the amount is R3 277. How much did she invest?

3. In April 2008 Sibusiso borrowed R240 000 at 11% compound interest per year, compounded
yearly for 5 years to buy a car. How much did he pay for the car in total?

4. R3200 is invested and after 6 years there is R4900 in the account. Interest is compounded
yearly. Determine the yearly rate of interest, correct to two decimal places.

5. If the average rate of inflation is 7,3% and your water and electricity accounts is R1 425 on
average, what would you expect to pay in 6 years’ time?

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 3
DEPRECIATION

Simple depreciation/ straight line method

𝐴 = 𝑃(1 − 𝑖. 𝑛)

Compound depreciation / Reducing balance method / Diminishing balance method.

𝐴 = 𝑃(1 − 𝑖)𝑛

Where
• A = Future value / Final Value (Investments, Loans, etc)
• P = Present value/ Initial Value (Money invested, Money borrowed, etc)
• n = number of years
• r = interest rate in percentage
𝑟
• i = interest rate in decimal form, 𝑖 = 100

Example 3

1. A car with a value of R125 000 depreciates at 18% per annum on a reducing balance. What
will the car be worth in 5 years’ time?
Exercise 3

1. A computer is purchased for R16 000. It depreciates at 15% per annum. Determine the book
value of the computer after 3 years if depreciation is calculated according to the straight-line
method.

2. A farmer bought a tractor for R980 000. The value of the tractor depreciates annually at a rate
of 9,2% p.a. on the reducing-balance method. Calculate the book value of the tractor after 7
years.

3. A company bought office furniture that cost R120 000. After how many years will the
furniture depreciate to a value of R41 611,57 according to the reducing-balance method, if the
rate of depreciation is 12,4% p.a.?

4. A company bought a new machine for R500 000. After 3 years, the machine has a book value
of R331 527. Calculate the yearly rate of depreciation if the machine was depreciated
according to the reducing-balance method.

5. How long would the price of an asset take to reduce by a third of its original value if it
depreciates on a reducing balance at a rate of 4,7% p.a.?

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 4
The effect of different periods of compound increase.

Interest compounded Interest rate Number of years

Monthly 𝑖 𝑛 × 12
12
Quarterly 𝑖 𝑛×4
4
Half yearly 𝑖 𝑛×2
2

Example 4

4. An amount increases by 5% per year, compounded half yearly. After 7 years the final
amount is R20 000. How much money was invested?

5. Determine at what interest rate per year, at compound interest, an amount of R500 will grow
to R960 in 6 years. If the interest is compounded quarterly.

Exercise 4

1. Diane invests a lump sum of R5 000 in a savings account for exactly 2 years. The investment
earns interest at 10% p.a., compounded quarterly. Calculate the amount in Diane's savings
account at the end of the 2 years.

2. How many years will it take for an amount of R75 000 to accrue to R116 253,50 in an account
earning interest of 6,8% p.a., compounded monthly?

3. An amount of R10 000 was invested for 4 years, earning interest of r% p.a., compounded half
yearly. At the end of 4 years, the total amount in the account was R13 000. Determine the
value of r.

4. How many years will it take for an investment to double in value, if it earns interest at a rate
of 8,5% p.a., compounded monthly?

5. Anisha and Lindiwe each received R12 000 to invest for a period of 5 years. They invested
the money at the same time according to the following options:

• Anisha: 8,5% p.a. simple interest. At the end of the 5 years, she will receive an additional
bonus pay-out of exactly 7,5% of the original amount invested.
• Lindiwe: 8,5% p.a. compounded quarterly.

Who will have the larger final amount after 5 years? Justify your answer with appropriate
calculations.

6. Abram has R150 000 to invest in two separate accounts. One account pays interest at a rate
of 8,4% per annum, compounded quarterly, and the other account at a rate of 9,6% per
annum, compounded monthly. How much money should he invest in each account so that he
will collect the same amount from each account at the end of 12 years?

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 5
Nominal and Effective interest rate

Nominal interest rate

• The nominal interest rate is the rate of interest without adjustment for the full effect of
compounding.

Effective Interest rate

• The effective Annual Interest rate is the rate of interest that an investor can earn or pay in a
year after taking into consideration compounding.

Effective interest formula

𝑖𝑛𝑜𝑚 𝑚
1 + 𝑖𝑒𝑓𝑓 = (1 + )
𝑚
𝑖𝑒𝑓𝑓 is the effective interest rate.
𝑖𝑛𝑜𝑚 is the nominal interest rate.
𝑚 is the number of times the interest is compounded in a year.

Example 5

Determine the annual effective interest rate of 12% p.a. is compounded monthly.

Exercise 5

1. The nominal interest rate of an investment is 12,35% p.a., compounded monthly. Calculate
the effective interest rate.

2. An investment earns interest at a rate of 7% per annum, compounded semi-annually.

Calculate the effective annual interest rate on this investment.

3. Determine the annual effective interest rate if interest is compounded at 12% p.a.
compounded quarterly.

4. Determine the nominal interest rate, compounded semi-annually, which results in an

effective annual interest rate of 11,5% p.a. (correct to one decimal place)

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 6
Annuities

• An annuity is a series of equal payments made at equal intervals subjected to a rate of

interest.

Future Value annuity

• With this annuity equal payment are paid into a saving account or invested fund, whereas
the final amount will be received in the future. Compound interest is paid on the money
deposited. e.g., Sinking funds, provident funds

• Future value formula

𝑥[(1 + 𝑖)𝑛 − 1]
𝐹𝑣 =
𝑖
Where
F = Accumulated amount / Final amount
x = value of the regular payment
i = interest rate
n = no of payments

Example 6

1. Sam starts saving money at the age of 20 for his pension. He pays R700 every month into a
pension fund starting on his 20th birthday. Calculate how much money he will have saved by
the time he turns 60, assuming that his last payment is made one month before his 60 th
birthday. The interest is calculated 11,4% p.a. compounded monthly.

2. On 30 June 2013 and at the end of each month thereafter, Asif deposited R2 500 into a bank
account that pays interest at 6% per annum, compounded monthly. He wants to continue to
deposit this amount until 31 May 2018.Calculate how much money Asif will have in this
account immediately after depositing R2 500 on 31 May 2018.

Exercise 6

1. Every month Tshepo deposited R1 500 for his retirement into an account that paid interest at
a rate of 9,2% per annum, compounded monthly. Tshepo made his first instalment on his 23
rd
birthday and the last instalment one month before his 55 th birthday. Calculate how much
money he had in the account on his 59th birthday.

2. On 31 January 2022, Tino deposited R1 000 in an account that paid interest at 7,5% p.a.,
compounded monthly. He continued depositing R1 000 on the last day of every month. He
will make the last deposit on 31 December 2022. Will Tino have sufficient funds in the account
on 1 January 2023 to buy a computer that costs R13 000? Justify your answer by means of an
appropriate calculation.

3. Tebogo opened a savings account with a single deposit of R5 000 at the beginning of June
2015. He then made 24 monthly deposits of R800 at the end of every month, starting at
the end of June 2015. The account earned interest at 15% p.a. compounded monthly.
Calculate the amount that should be in his savings account immediately after he makes
the last deposit.

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 7
4. Neil set up an investment fund. Exactly 3 months later and every 3 months thereafter he
deposited R3 500 into the fund. The fund pays interest at 7,5% p.a., compounded quarterly.
1
He continued to make quarterly deposits into the fund for 6 2 years from the time he
originally set up the fund. Neil made no further deposits into the fund but left the money in
the same fund at the same interest rate. Calculate how much he will have in the fund 10 years
after he originally set it up.

5. A businesswoman deposited R9 000 into an account at the end of January 2014. She
continued to make monthly deposits of R9 000 at the end of each month up to the end of
December 2018. The account earned interest at a rate of 7,5% p.a., compounded monthly.

5.1 Calculate how much money was in the account immediately after 60 deposits had
been made.

5.2 The businesswoman left the amount calculated in 5.1 for a further n month in the
account. The interest rate remained unchanged, and no further payments were made.
The total interest earned over the entire investment period was R190 214, 14.
Determine the value of n.

6. A company purchased machinery for R500 000. After 5 years, the machinery was sold for
R180 000 and new machinery was bought.

6.1 Calculate the rate of depreciation of the old machinery over the 5 years, using the
reducing-balance method.

6.2 The rate of inflation for the cost of the new machinery is 6,3% p.a. over the 5 years.
What will the new machinery cost at the end of 5 years?

6.3 The company set up a sinking fund and made the first payment into this fund on the
day the old machinery was bought. The last payment was made three months before
the new machinery was purchased at the end of the 5 years. The interest earned on
the sinking fund was 10,25% p.a., compounded monthly. The money from the sinking
fund and the R180 000 from the sale of the old machinery was used to pay for the
new machinery. Calculate the monthly payment into the sinking fund.

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 8
7. Lebogo bought a tractor for Rx on 1 April 2016.

• She will trade in this tractor when she replaces it with a similar one in 5
years' time on 1 April 2021.
• The tractor depreciates by 20% p.a. according to the reducing-balance
method. The price of a similar tractor increases by 18% annually.
• Lebogo calculated that if she deposited R8 000 per month into a sinking
fund, which paid interest at 10% p.a. compounded monthly, she would have
enough money to cover the replacement cost of the tractor. She made the
first deposit in this fund on 30 April 2016 and will continue to do so at the
end of every month until 31 March 2021.

7.1 Determine, in terms of x, what the book value of the current tractor will be on
1 April 2021 (that is, 5 years after it was bought). Give your answer correct to FIVE
decimal places.

7.2 Determine, in terms of x, what the price of a similar new tractor will be on 1
April 2021. Give your answer correct to FIVE decimal places.

7.3 Calculate the amount accumulated in the sinking fund on 1 April 2021

7.4 Calculate the value of x, the price of the current tractor. Round off your answer to the
nearest thousand.

Present Value annuity

• Money is received then paid by regular payments together with the interest accrued. e.g.
Loans, Mortgage Bond, Car repayment
• Present value formula
𝑥[1 − (1 + 𝑖)−𝑛 ]
𝑃𝑣 =
𝑖
Where
𝑃𝑣 = Present value

Example 7

Piet takes a loan from a bank to buy a car for R235 000. He agrees to repay the loan over a period
of 54 months. The first instalment will be paid one month after the loan is granted. The bank
charges interest at 11% per annum, compounded monthly. Determine Piet’s monthly instalment.

Exercise 7

1. Steven buys a bicycle factory with tools and machinery, to manufacture his new sets of
bikes. He takes out a loan of R4 million at Lila’s bank. Calculate his monthly repayments if
he plans to repay the loan in 15 years. The interest charged by Lila’s bank on the loan is
8,5% p.a. compounded monthly.

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 9
2. Today, Andrew borrowed R200 000 from a bank. The bank charges interest at 5,25% p.a.,
compounded quarterly. Andrew will make repayments of R6 000 at the end of every 3
months. His first repayment will be made in 3 months from now. How long, in years, will it
take Andrew to settle the loan.

3. Lorraine receives an amount of R900 000 upon her retirement. She invests this amount
immediately at an interest rate of 10,5% per annum, compounded monthly. She needs an
amount of R18 000 per month to maintain her current lifestyle. She plans to withdraw the
first amount at the end of the first month. For how many months will she be able to live from
her investment?

4. Lerato wishes to apply for a home loan. The bank charges interest at 11% per annum,
compounded monthly. She can afford a monthly instalment of R9 000 and wants to repay the
loan over 15 years. She will make the first monthly repayment one month after the loan is
granted. Calculate, to the nearest thousand rand, the maximum amount that Lerato can
borrow from the bank.

5. Samuel took out a home loan for R500 000 at an interest rate of 12% per annum, compounded
monthly. He plans to repay this loan over 20 years and his first payment is made one month
after the loan is granted.

5.1 Calculate the value of Samuel's monthly instalment.

5.2 Melissa took out a loan for the same amount and at the same interest rate as Samuel.
Melissa decided to pay R6 000 at the end of every month. Calculate how many
months it took for Melissa to settle the loan.

5.3 Who pays more interest, Samuel or Melissa? Justify your answer.

The effect of paying a deposit

𝑃𝑣 = Cost Price − deposit

Example 8

Mr and Mrs Makhanya decided to buy a new house for R1 million for their 10th year anniversary.
They decide to sell their old house and use the money for deposit for their new house. The current
value of their old house is R400 000. They decide to take a home loan at Tshudu’s bank for the
remaining balance of the new house. Tshudu charges the couple an interest of 9 % p.a. calculated
monthly. Calculate the monthly repayment on the loan if the loan is paid over 20 years.

Exercise 8

1. Sylvia plans to buy a car for R125 000. She pays a deposit of 15% and takes out a bank loan
for the balance. The bank charges 12,5% p.a. compounded monthly. Calculate

1.1 The value of the loan Susan borrowed from the bank.

1.2 The monthly repayment on the car if the loan is repaid in six years.

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 10
2. Lerato wants to purchase a house that costs R850 000. She is required to pay a 12% deposit
and she will borrow the balance from a bank.

2.1 Calculate the amount that Lerato must borrow from the bank.

2.2 The bank charges interest at 9% per annum, compounded monthly on the loan amount.
Lerato works out that the loan will carry an effective interest rate of 9,6% per annum. Is
her calculation correct or not? Justify your answer with appropriate calculations.

2.3 Lerato takes out a loan from the bank for the balance of the purchase price and agrees to
pay it back over 20 years. Her repayments start one month after her loan is granted.
Determine her monthly instalment if interest is charged at 9% per annum compounded
monthly.

2.4 Lerato can afford to repay R7 000 per month. How long will it take her to repay the loan
amount if she chooses to pay R7 000 as a repayment every month?

Delayed / Missed Payments

𝑃𝑣 = 𝑃(1 + 𝑖)𝑛

Where
𝑛 = no of months on which the loan will accumulate interest before the first payment is made.
𝑃 = the original value of the loan granted.
Balance

𝑥 (1 + 𝑖)𝑛 − 1
Balance = 𝑃(1 + 𝑖)𝑛 − 𝑖
, 𝑛 = no of payments made

Example 9

1. Timothy buys furniture to the value of R10 000. He borrows the money on1 February 2010
from a financial institution that charges interest at a rate of 9,5% p.a., compounded monthly.
Timothy agrees to pay monthly instalments of R450. The agreement of the loan allows
Timothy to start paying these equal monthly instalments from 1 August 2010.

1.1 Calculate the total amount owing to the financial institution on 1 July 2010

1.2 How many months will it take Timothy to pay back the loan?

1.3 What is the balance of the loan immediately after Timothy has made the 25th payment?

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 11
Exercise 9

1. Thabo plans to buy a car that costs R250 000. He will pay a deposit of 15% and take out a loan
for the balance. The interest on the loan is 13% p.a., compounded monthly.

1.1 Calculate the value of the loan.

1.2 The first repayment will be made 6 months after the loan has been granted. The loan will
be repaid over a period of 6 years after it has been granted. Calculate the MONTHLY
instalment.

2. On 1 February 2018, Genevieve took a loan of R82 000 from the bank to pay for her studies.
She will make the first repayment for R3 200 on 1 February 2019 and continues to make
payments of R3 200 on the first of each month thereafter until she settles the loan. The bank
charges interest at 15% per annum compounded monthly.

2.1 Calculate how much Genevieve will owe the bank on 1 January 2019.

2.2 How many instalments of R3 200 must she pay?

2.3 Calculate the final payment, to the nearest rand, Genevieve must pay to settle the loan.

3. On 1 June 2016 a bank granted Thabiso a loan of R250 000 at an interest rate of 15% p.a.
compounded monthly, to buy a car. Thabiso agreed to repay the loan in monthly instalments
commencing on 1 July 2016 and ending 4 years later on 1 June 2020. However, Thabiso was
unable to make the first two instalments and only commenced with the monthly instalments
on 1 September 2016.

3.1 Calculate the amount Thabiso owed the bank on 1 August 2016, a month before he paid
his first monthly instalment.

3.2 Having paid the first monthly instalment on 1 September 2016, Thabiso will still pay his
last monthly instalment on 1 June 2020. Calculate his monthly instalment.

3.3 If Thabiso paid R9 000 as his monthly instalment starting on 1 September 2016, how
many months sooner will he repay the loan.

3.4 If Thabiso paid R9 000 as a monthly instalment starting on 1 September 2016, calculate
the final instalment to repay the loan.

4. A father decided to buy a house for his family for R800 000. He agreed to pay monthly
instalments of R10 000 on a loan which incurred interest at a rate of 14% p.a. compounded
monthly. The first payment was made at the end of the first month.

4.1 Show that the loan would be paid off in 234 months.

4.2 Suppose the father encountered unexpected expenses and was unable to pay any
instalments at the end of the 120th, 121st, 122nd and 123rd months. At the end of the 124th
month he increased his payment to still pay off the loan in 234 months by 111 equal
monthly payments. Calculate the value of this new instalment.

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 12
5. Siphokazi bought a house. She paid a deposit of R102 000, which is equivalent to 12% of the
selling price of the house. She obtained a loan from the bank to pay the balance of the selling
price. The bank charges her interest of 9% per annum, compounded monthly.

5.1 Determine the selling price of the house.

5.2 The period of the loan is 20 years and she start repaying the loan one month after it was
granted. Calculate her monthly instalment.
th
5.3 Calculate the balance of her loan immediately after her 85 instalment.
th
5.4 She experienced financial difficulties after the 85 instalment and did not pay any
instalments for 4 months (that is months 86 to 89). Calculate how much Siphokazi owes
th
on her bond at the end of the 89 month.

“You learn more from failure than from success. Don’t let it stop you. Failure builds character” – Unknown 13