Chapter 5

Exercises

1. If , without solving for n, find the value of

a)

b)
at an interest rate of 1% per period.

2. For 9 years, Amy deposits R2 500 every 4 months in a savings account that earns interest of
9% p.a. effective. How much is in her accumulated account at the end of the 9 years if
deposits are made
a) at the end of every 4 month period
b) at the start of every 4 month period

3. Anna buys a car for R 370 000. She pays a deposit of 10% of the price of the car
immediately, and pays the balance of by way of monthly installments at the end of each
month over 5 years as well as a final payment at the end of 5 years of 30% of the price of the
car. The interest rate charged on the loan is 6.5% p.a. effective.
a) Calculate the value of the installments
b) How much does she still owe on the car immediately after the 30th installment
c) What would the amount of the installment be if dealer offers her a contract where
she get an installment “holiday” for one year.

4. An insurance company writes a 5 year savings policy which pays R100 000 at the end of the 5
years. A monthly premium is payable at the end of each month for the term of the policy.
The insurance company earns a return of 11% p.a. compounded monthly on premiums
invested.
a) Calculate the amount of the monthly premium
b) Immediately after the 12th premium deposited, the return earned on premiums
increases to 13% p.a. compounded monthly. What will be the amount in the
insurer’s account at the end of the 5 years, if premiums stay fixed.
c) What amount can the remaining premiums reduce to in order that the insurer will
still be able to pay the R100 000 at the end of the policy.

5. On 1 January 2020 Mike receives an amount of R 75 000 as a bursary. He invests this in an

[6.] An investor deposits R 350 at the end of each month into an account that earns interest at a
rate of 12% p.a. compounded monthly. Calculate the amount of interest earned during the
fourth third year that he makes the deposits.
6.[7.] A loan of R 50 000 is paid off by means of quarterly installments in arrear of R4 600 at an
interest rate of 7% p.a payable quarterly. If necessary, the last installment will be larger
than R4 600. Calculate the term of the loan and the value of the last installment.

7.[8.] Alan is 58 years old. He wants to retire at age 65 and receive an annuity of R 12 000 per
month in arrears for the first 5 years of retirement, and R15 000 per month in arrears for the
next 10 years. How much should he set aside now in order to fund his retirement if he can
earn an interest rate of 7% p.a. effective in a savings account. The account charges an
annual fee of 1.2% per annum.

8.[9.] A charity earns interest at a rate of 8% p.a. compounded monthly. The charity wishes to
pay an ongoing annual amount of R50 000 toward underprivileged childrens’ school fees.
How much capital will be needed to fund this if payments commence
a) Immediately
b) After one year
c) After two years

9.[10.] Find
a) at 3% per annum effective
b) at 4% per annum convertible quarterly
c) at 2.5% per annum convertible every 2 years
the present value of the following annuities
(i) R100 per annum payable for 10 years
(ii) R200 per quarter payable for 10 years
(iii) R150 payable every three years for 18 years

10.[11.] A company pays dividends once a year, at the end of each year. The last dividend paid
was R5,00 per share and has just been paid. An investor wants to buy shares in the
company. He thinks dividends will increase by 5% every year. The investor intends to never
sell the share once purchased, and needs to earn 6% p.a. on his investment. How much
should he pay for the share?

11.[12.] Two annuities of 1 per period are each payable quarterly for n years. The first payment
under one is due 3 months from now, and under the other at the end of 6 months from now.
The total present value of the annuities is 42.858.
The amount of an immediate annuity of 1 per quarter for n years is 22.252.

If the same effective interest rate, i, applies throughout, find the values of n and i.

12.[13.] A agrees to pay B the sum of R1000 at the end of 25 years in return for a yearly payment
for 25 years of R24.01, the first payment being due in 12 months. At the end of 8 years B
cannot continue in full and suggests that
a) Payments by B should cease and A should be liable to pay only R 350 at the end of
the original 25 years;
b) B should pay, in future, only R10 per annum and A should pay R600 at the end of the
25 years;
c) A should pay R180 now and close the transaction
 Which offer, if any, should A accept assuming that the rate of interest on which the
transaction was originally based is still appropriate.

13.[14.] Find the present value of a 20 year lease under which the annual rent is R 1000 for the
first 5 years, R1200 for the next 5, R1400 for the next 5 and so on. The rent is to be paid
annually for the first 5 years, half-yearly for the next 10 and quarterly thereafter. Interest is
at 4½% convertible half-yearly for the first 10 years and 4% convertible half-yearly
thereafter.