+
=
1 1
7-13
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.3 Present value of an annuity (cont)
Example
Melinda took out a loan from a credit union in order to purchase
a home computer. She was to repay the loan in monthly
instalments of $120 for 5 years. Calculate the present value of
these repayments if the interest rate was 9%, convertible
monthly
Solution
From Table 3:
60 5 12 n , 00785 . 0
12
09 . 0
i , 120 $ R = = = = =
17337352 . 48 a
0075 . 0 60
=
7-14
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.3 Present value of an annuity (cont)
Solution (cont)
That is, the repayments are worth $5780.80 at the beginning
of the loan
80 . 5780 $
17337352 . 48 120 $
a R A
i n
=
=
=
7-15
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.4 Amortisation
When an individual or business pays a debt (including interest)
by making periodic payments at regular intervals, the debt is
said to be amortised.
An amortisation problem involves finding the periodic payment
that will discharge a debt.
In particular, as each periodic payment is made, this amount
covers part of the principal and interest on the balance of the
principal.
In turn, there is a reduction in the remaining principal such that
at the end of the term of the annuity the debt is extinguished.
7-16
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.4 Amortisation (cont)
Example
A family undertakes a mortgage of $40 000 from a bank in order to
buy its new home. The bank charges interest at a rate of 12% per
annum, compounded quarterly over 20 years. What quarterly
payments will the family have to make on this loan?
Solution
From Table 3:
80 20 4 n , 03 . 0
4
12 . 0
i , 40000 $ A = = = = =
20076345 . 30 a
03 . 0 80
=
7-17
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.4 Amortisation (cont)
Solution (cont)
Hence, the family must repay the loan at the rate of $1324.47 per quarter.
Note that the family will, in fact, be paying back to the bank a total of
$1324.47 80 = $105 957.60, considerably more than the original $40 000
loan!
47 . 1324 $
20076345 . 30
40000 $
R
a R 40000
a R A
03 . 0 80
i n
=
=
=
=
7-18
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.5 Sinking funds
A sinking fund is a fund into which periodic payments are made
so as to accumulate a nominated amount of money at the end of
a specified period
It is assumed that each deposit earns compound interest until the
end of the period
Where:
S = future value
R = annuity payment per period
i = interest rate per period
n = number of payments
( )
i
1 i 1
S
R
n
+
=
i n
s
S
R =
or
7-19
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.5 Sinking funds (cont)
Example
Connie is planning to spend her Christmas holidays in 2 years
time in the United States. She estimates that she will need an
amount of $6000 to pay for her airfares, accommodation and
other expenses. She is going to save her money in an account
that attracts 10% interest per annum, compounded quarterly.
How much will Connie have to deposit into her account at the
end of each quarter, to have the desired amount at the end of 2
years?
7-20
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
7.5 Sinking funds (cont)
Solution
So
If Connie deposits $686.80 every 3 months over the 2 years,
she will have the required $6000 at the end of that time
8 4 2 n , 025 . 0
4
10 . 0
i , 6000 $ S = = = = =
( )
73611590 . 8
025 . 0
1 025 . 0 1
s
8
025 . 0 8
=
+
=
80 . 686 $
76311590 . 8
6000 $
R
=
=
7-21
Copyright 2010 McGraw-Hill Australia Pty Ltd
PowerPoint slides to accompany Croucher, Introductory Mathematics and Statistics, 5e
Summary
We looked at understanding and applying annuities
We found the difference between future and present value of
annuities
We solved problems involving the future value of an annuity
We calculated the present value of an annuity
We calculated the periodic payment of a present value
annuity (amortisation)
We calculated the periodic payment of a future value annuity
(sinking fund)