QMA12 Ch1

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C H A P T E R
Managing money 1:
Investing for the future
This chapter addresses the following questions:
How do we invest using term deposits and savings accounts?
How do we invest in property and what hidden costs are associated with this investment?
How do we invest in the stock market and what hidden costs are associated with
this investment?
What is meant by annual rate of return?
How is the future value of a lump sum calculated?
How is the present value of a lump sum calculated?
What is an annuity and how can it be used for investment?
What criteria can be used to compare investment options?
1.1
Savings accounts and term deposits

A popular and relatively safe way to invest money is to put it in the bank. Generally, banks
tend to offer two choices of cash investment. These are term deposits and savings accounts.
Term deposits
Term deposits generally have higher interest rates than savings accounts.
Money is generally locked in for a xed term, and a fee will apply to access money
before the end of the term.
Usually simple interest is paid upon maturation (the end of the term), but interest may be
paid quarterly, half-yearly or even monthly, sometimes with the option to pay interest
back into the term deposit.
The interest rate is xed for the term of the deposit.
Mike Cujes, Diana Smith 2009

ISBN 978-0-521-13560-3
Photocopying is restricted under law and this material must not be transferred to another party.
Cambridge University Press
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Cambridge Queensland Mathematics A Year 12
Recall that for simple interest:

Interest
amount invested interest rate (per annum) length of time (in year)
100
Prt
Prt

100
100
Prt
Amount of the investment = P I P
100
where the amount invested or borrowed (P) is known as the principal, r is the interest
rate and t is the time (in years).
or
I
Example 1
Simple interest: term deposits
Calculate the amount of simple interest that will be paid on a term deposit of $7000 at 8.7%
simple interest per year, maturing after 18 months.
Solution
Apply the formula with P 7000, r 8.7
and t 1.5 (since 18 months is
equivalent to 1.5 years).
Example 2
I
Prt
8.7
7000
1.5
100
100
$913.50
Calculating the total amount invested
Find the total amount (interest and principal) paid to an investor who takes out a 2-year term
deposit of $16 000 at 8% per annum.
Solution
1 Apply the formula with P 16 000,
r 8 and t 2 to nd the interest.
2 Find the total by adding the interest
to the principal.
I
8
Prt
16 000
2 $2560
100
100
A P I 16 000 2560 $18 560

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Chapter 1 Managing money 1: Investing for the future
Example 3
Calculating the principal invested: simple interest
Jo wants to have $50 000 in 2 years time, to use as a deposit for a house. How much should
she invest in a term deposit, paying 7.75% interest upon maturity, to ensure she will have this
money in 2 years?
Solution
1 Write down the Amount formula.
APIP
2 Here we are not given the value of the interest

I, but the value of the total investment A.
We will use A = $50 000, r 7.75
and t 2 to nd the principal, P.
50 000 P
3 Divide 50 000 by 1.155 to nd P.

4 Write the answer as a sentence.
Prt
100
P 7.75 2
100
50 000 P 0.155P
50 000 1.155P
50 000
$43 290
P
1.155
Jo needs to invest $43 290 now to have
$50 000 in 2 years time.
Savings accounts
Money is generally easily accessible.
Interest is often calculated daily and paid monthly and therefore compounds.
Interest may be paid on whole sum or only on parts over a certain value.
Fees may apply.
The interest rate may be variable.
Recall the formula for compound interest, below.
In general:
A P a1
r>n nt
b
100
where $A the amount of the investment after t years

$P the initial amount
r the interest rate per annum
n the number of times per year interest is compounded
t the number of years
The interest ($I) that would result from investing $P at r% per annum compounded
annually for a time period of t years is:
IAP

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Example 4
Compound interest
Determine the amount of money accumulated after 3 years if $2000 is invested in a savings
account at an interest rate of 8% per annum, compounded monthly.
Determine the amount of interest earned.
Solution
1 Substitute P $2000, nt 3 12 36,
r
8

n 12
2 Subtract the principal from this amount.
to determine the interest earned.
A P a1
r>n nt
b
100
8/12 36
A 2000 a1
b
100
$2540.47
I A P $2540.47 $2000
$540.47
How to set up Equation Solver to solve for any variable in the compound-interest
formula using the TI-83
Steps
1 Select MATH and move the cursor down to
0:Solver... as shown.
2 Press ENTER.

ISBN 978-0-521-13560-3
3 The equation we wish to enter into the calculator is:

A P a1
r>n nt
b
100
This needs to be rearranged so that the left side of the

equation is 0. We do this by subtracting
A as shown:
r>n nt
b A
0 P a1
100
Using the ALPHA key, type the formula into the calculator as
shown. The calculator will only allow you to type capital letters.
Dont forget to put * and / symbols between the letters, and be
careful with the brackets.
4 Press ENTER to obtain the window shown.
5 If you now enter values for any four of P, r, n, t or A,

the calculator will nd the value of the other variable.
Lets check this using P 2700, r 6, n 12 and t 2.
6 (Optional step) You can speed up the calculation by giving

the calculator a bit more information about the answer (bound).
Set the lower bound to 0, since we know that the answer must be
positive, and leave the upper limit as it is.
7 Move the cursor to A, and press ALPHA SOLVE. The value of

the investment will now be determined and inserted at A (this may
take a few seconds, so be patient). From the calculator we can see
that A $3043.33. You can use the compound-interest formula to
check this result.

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Example 5
Calculating the time period for an investment
How long, to the nearest year, will it take for an investment of $1000 to reach $1873 if it is
invested as 9% per annum compounded monthly?
Solution 1 by hand
1 In this example A 1873, P 1000, r 9,
n 12 and we wish to nd t. Substitute these
values into the compound-interest formula.
2 Now we need to use a special relationship

between variables: when we have an equation
3 Evaluate.
4 Round off to the nearest year.
log B
log C
r>n nt
b
100
1873 1000 a 1
1.873 a 1
Dividing both sides by 1000 gives us:
in the form B C d, we can rewrite it as d
A P a1
9>12 12t
b
100
9>12 12t
b
100
So if 1.873 a 1
Then 12t
9>12 12t
b
100
log (1.873)
log a 1
9/12
b
100
12t 83.985 569 76 ...

t 6.998 797 48 ...
t 7 years

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Solution 2 Graphics calculator

1 In this example where A 1873, P 1000, r 9 and
n 12, we wish to nd t. Press MATH, then 0: Solver...
and substitute these values as shown, again changing
the lower bound to 0.
2 Move the cursor to t, and select ALPHA SOLVE.

The time will now be determined and inserted at t. From the
calculator we see that t 7 to the nearest year.
Answer: 7 years
Example 6
Find the interest rate for an investment
Suppose an investment of $2000 has grown to $2123.40 after 12 months invested at r% per
annum compound interest, compounded monthly. Find the value of r, to two decimal places.
Solution 1 By hand
A P a1
r>n nt
b
100
r>12 12x1
2123.40 2000 a 1
b
100
r>12 12
2123.40
a1
b
2000
100
r>12 12
b
1.0617 a 1
100
1 In this example where A 2123.40, P 2000,

n 12, t 1 and we wish to nd r.
2 Write the compound-interest formula
and substitute the known values.
3 Divide both sides by 2000.
4 Take the 12th root of both sides.
5 Subtract 1 from both sides.

6 Multiply both sides by 100.
7 Multiply both sides by 12.
2(1.0617) 1
r>12
100
1.005 001 75 p 1
r>12
100
12
r>12
100
r
0.500 175 ...
12
12 0.500175 r
r 6.00% p.a.
0.00 5001 75

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Solution 2 Graphics calculator

1 In this example A 2123, P 2000, n 12, t 1 and we
wish to nd r. Select MATH, then 0:Solver . . . and substitute
these values as shown, again changing the lower bound to 0.
2 Move the cursor to r, and select ALPHA SOLVE. The interest

rate will now be determined and inserted at r. From the calculator we see that r 6.00% to two decimal places.
Answer: 6.00% per annum

Using statements to calculate interest
Example 7
Julian has an Altitude Saver account with the Australian Bank of Commerce (ABC). Interest
of 7.79% per annum (p.a.) is calculated daily and paid monthly, on the rst day of the following month. Julians statement for June and July is shown below, with some omissions.
Calculate his balance on the rst day of August.
Date
1 June
5 June
23 June
29 June
1 July
17 July
1 August
Credit ($)
Debit ($)
500.00
483.00
389.00
Balance ($)
4000.00
4500.00
4017.00
4406.00
689.00
Solution
1 Calculate the interest
for each time period
in June. This will be
simple interest,
because it is only
added on at the end
of the month.
I
Prt
100
Date
Balance
($)
Interest
($)
14 June
4000.00
4000 7.79 4 (days)

100 365
$3.41
522 June
4500.00
4500 7.79 18
100 365
$17.29
2328 June
4017.00
4017 7.79 6
100 365
$5.14
2930 June
4406.00
4406 7.79 2
100 365
$1.88
Interest

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2 Calculate the total interest

for June.
3 Fill in the remainder of the
statement, remembering
that the interest is paid
on 1 July.
4 Calculate the interest paid
for July.
Total interest $3.41 $17.29 $5.14 $1.88

$27.72
Date
1 July
17 July
Date
Credit ($)
27.72
689.00
Debit ($)
Balance ($)
4433.72
5122.72
Balance ($)
Interest ($)
Interest
116 July
4433.72
4433.72 7.79 16
100 365
15.14
1731 July
5122.72
5122.72 7.79 15
100 365
16.40
5 Calculate the total interest. Total interest for July $15.14 $16.40 $31.54
6 Find the balance on
Balance balance on 17 July interest for July
1 August.
Balance $5122.72 $31.54 $5154.26
When deciding how best to invest
money, a persons individual
circumstances must be taken into
account. There are many different
types of savings accounts and term
deposits and you must read the
conditions of each account carefully,
so that you know how interest is
calculated, and if any fees apply.
Exercise 1A
1 A sum of $12 000 was invested in a xed-term deposit account for 3 years. The interest is
paid to the investor at the end of this time period. Calculate:
a the simple interest earned if the rate of interest is 6.5% per annum
b the total value of the investment at the end of 3 years.
2 Eliza invests $120 000 in a term deposit for 6 months at a rate of 7.85% per annum. How
much interest is she paid on maturity?

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10
3 A building society offers the following interest rates for its term deposits.
Interest rate (per annum) on term (months)
Balance
12
18
24
$20 000$49 999
2.85%
3.35%
3.85%
4.35%
4.85%
$50 000$99 999
3.00%
3.50%
4.00%
4.50%
5.00%
$100 000$199 999
3.40%
3.90%
4.40%
4.90%
5.40%
$200 000 and over
4.00%
4.50%
5.00%
5.50%
6.00%
Using this table, nd the interest earned by each of the following investments. Give your
answer to the nearest cent:
a $25 000 for 3 months
c $37 750 for 18 months
e $74 386 for 1.5 years
b $19 000 for 6 months

d $200 000 for 2 years
f $145 000 for 12 months.
4 Calculate the compound interest for the following:

a $2000 invested at 6% per annum for 4 years, compounded yearly
b $10 000 invested at 12% per annum for 5 years, compounded quarterly
c $8000 invested at 12.5% per annum for 3 years, compounded monthly.
5 How much money would be in an account after 5 years if $3000 is invested at 10% per
annum compounded annually?
6 Compare the interest earned with both simple and compound interest if $4500 is invested
at 11% per annum for 6 years, compounded yearly. What is the amount of the difference?
7 a Find the amount of money in the following accounts after 1 year if the initial investment
of $1000 is invested at 7% per annum, compounded:
i annually
ii quarterly
iii monthly
b What do you notice about your answers in a?
iv weekly
v daily.
8 a Find the total amount owed on a loan of $850 borrowed at 13.25% per annum compound interest adjusted (paid) weekly for 6 months.
b Use your graphics calculator to construct a graph of the amount owed against time (in
years).
9 Singh wishes to buy a boat in 5 years time. He estimates that it will cost him $15 000.
His bank offers him an interest rate of 6.25% per annum compounded yearly for the 5-year
term.
a How much money should he invest now in order to have sufcient funds to buy the boat
in 5 years time?
b If the interest was added daily, how much less would he need to invest?
10 What initial investment is required to produce a nal amount of $30 000 in 30 months
time, given that an interest rate of 9.7% per annum compounded quarterly is guaranteed?
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11 On the birth of his granddaughter, a man invests a sum of money at a xed rate of 11.65% per
annum compounded twice a year. On her 21st birthday he gives all the money in the account
to his granddaughter. If she receives $2695.55, how much did her grandfather invest?
12 Sarah invested $3500 at 6.75% per annum compound interest, adjusted monthly. If the
investment now amounts to $5241.61, for how many years was it invested?
13 If a principal of $6000 is invested at 5.25% per annum, compounded half-yearly, and the
amount due is $7774.69, for how many years was it invested?
14 How long would it take for $200 to exceed $20 000 if it was invested at 4.75% per annum
compounded yearly?
15 Suppose an investment of $1000 has grown to $1051.16 after 12 months invested at r %
per annum compound interest compounded monthly. Find the value of r.
16 Geoff invests $18 000 in an investment account. After 2 years the investment account
contains $19 299.27. If the account pays r % interest per annum compounded quarterly,
nd the value r, to one decimal place.
17 Roberta is trying to plan for her retirement. She is looking for an investment. Investing in
alpacas has been suggested as a possible alternative, and the advertising literature suggests
that Roberta will double her investment in 3 years.
a Suppose Roberta has $30 000 to invest. What annual interest rate would she need to get
from the bank to achieve the same return promised from the alpaca investment, to the
nearest whole number? (Assume that the bank would pay interest compounded monthly.)
b Suppose Roberta has $50 000 to invest. Does this change your answer to part a?
18 Philip wishes to invest $1500 for 5 years. Which of the following is his best option?
A 11% per annum, interest compounded weekly
B 11.75% per annum, interest compounded quarterly
C 12.5% per annum, simple interest in a term deposit, interest paid on maturity
19 The interest rates for a popular cash management savings account are shown below. The
interest is compounded annually.
$10 000$20 000
$20 000$50 000
$50 000$100 000
$100 000$250 000
$250 000$500 000
$500 000 plus
5.50% p.a.
5.75% p.a.
6.00% p.a.
6.25% p.a.
6.50% p.a.
6.75% p.a.
Calculate the total amount of money in Saras account if she invests:

a $35 780 for 3 years
c $11 000 for 3 years.
b $90 732 for 5 years
20 With reference to the above table, which comes from a real banks website, what problems
may investors encounter when working out how much interest they would earn on $100 000?
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21 The same bank offers the following interest rates in a retirement savings account:
$1$1999
$2000$4999
$5000$39 399
$39 400 plus
1.00% p.a.*
4.00% p.a.*
4.00% p.a.*
6.00% p.a.*
* 1.00% p.a. on the rst $1999, then 4.00% p.a. on that part of the balance between $2000
and $39 399, then 6.00% p.a. on that part of the balance over $39 400.
If Joy invests $50 000 for 1 year, calculate the interest she will earn if:
a interested is paid yearly
b interest is paid half-yearly
c interest is paid quarterly.
22 Amanda has a bank account with M4U bank. She pays a monthly account-keeping fee of
$5, which is withdrawn on the second day of every month and her account earns interest of
6.38% p.a. on any funds over $200 (that is, 0% interest on the rst $200 and 6.38% interest
thereafter.) Interest is calculated daily and paid on the rst day of each month. Complete the
statement below and then calculate the interest Amanda is paid for January.
Date
1 January
Credit ($)
Debit ($)
43
Balance ($)
2378
2 January
13 January
230
19 January
28 January
1.2
120
345
Real-estate investments
Many investors turn to real-estate investment as a higher-gain way to invest their money.
Recent growth in house prices in south-eastern Queensland has demonstrated that it is
possible for house values to grow 20% in 1 year, whereas banks offer much smaller returns
for term deposits of the same duration.
With this increased chance of growth comes a chance that real estate can decline in value.
Generally, the greater prots you stand to make, the greater risk you are accepting.
When you buy or sell a house there are many fees, charges, commissions and taxes that
you need to pay. The cost to the buyer is much higher than the price the buyer agrees upon
with the seller. The seller does not get all the money the buyer agrees to pay him or her.
Though landlords of investment properties often rent their properties out for income,
owning property can also prove expensive. Owners must pay rates to the local government
and pay body corporate fees to keep common property in order (usually for apartments or

ISBN 978-0-521-13560-3
13
townhouse complexes). Upkeep of

properties, such as painting,
electrical work, plumbing and
termite protection, must also be
considered.
To make a protable return on
property, the net gain of owning the
property must outweigh the net loss.
Even if a prot is made, it should be
more than would have been made if
the money used to invest in the
property was invested in a bank. To
compare these options, we can use the rate of return, which gives us the equivalent simple interest
rate we would receive if we put our money in the bank instead.
Example 8
Rates of return
Jananee buys a three-bedroom house for $240 000 (including all fees and charges) and
receives $300 000 from the sale 2 years later after all commissions and fees have been paid.
During this time she has had a rental tenant, paying $250 a week in rent, and has paid $451
per half-year council rates. Calculate her rate of return per annum.
Solution
1 Calculate total prot.
Total profit total earnings total expenses

Total profit $300 000 (52 2 250)
240 000 (451 4)
Total profit $84 196
2 Calculate rate of return for 2 years.
Rate of return (total profit/initial investment)

100%
84 196
Rate of return
100%
240 000
Rate of return 35.1%
35.1 %
Yearly rate of return
2
17.5% p.a.
3 Divide by 2 to nd rate of return

per year.

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14
Some of the major costs associated with buying and selling houses are transfer duty (which
was previously referred to as stamp duty) and agents commission. The transfer duty taxes
for buying investment properties are shown in the table below.
Value of property
Duty rate
Up to $5000
$5000 to $75 000
$75 000 to $540 000
$540 000 to $980 000
More than $980 000
Nil
$1.50 for each $100, or part of $100, by which the value is more
than $5000
$1050 plus $3.50 for each $100, or part of $100, by which the
value is more than $75 000
$17 325 plus $4.50 for each $100, or part of $100, by which the
$37 125 plus $5.25 for each $100, or part of $100, by which the
Agents commissions are paid by the seller to the real-estate agent. These commissions are
usually a percentage of the sale price, but can vary between agents and are often negotiable.
Example 9
Commissions and other costs
Kelly and Steve buy an investment property in January 2008 for $346 000. They rent it to
Gladys at $320 per week, but pay the real-estate agent 7% of the rental income for managing
the property. They also pay council rates of $347 per quarter and home insurance of $150 per
year. On average they spend $750 each year maintaining the property. In January 2012 they
sell the property for $515 000. Their agent charges a commission of 2.5% on the rst
$300 000 and 1.5% on the remainder. Calculate:
a
b
c
d
e
f
g
the transfer duty payable on the purchase of the property

the total cost of purchase
the total rental income with rental fees deducted
total costs associated with owning the property
the commission paid to the real-estate agent
the total prot or loss
the yearly rate of return.
Solution
a Calculate the transfer duty.
Duty $1050 plus $3.50 for each $100, or part of $100, by

which the value is more than $75 000
$346 000 $75 000
Number of parts over $75 000
$100
2710
Duty $1050 $3.50 2710
$10 535

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b Calculate the cost of purchase.
c 1 Calculate the total rental

income for 4 years.
2 Calculate the total fee paid
to real estate for managing
the property.
3 Calculate the total rental
income with fees deducted.
d 1 Calculate the cost of owning
the property per year.
2 Multiply by 4 to nd
the total cost of owning the
property over 4 years.
15
Cost of purchase cost of property transfer duty

$346 000 $10 535
$356 535
Rental income $320 52 4 $66 560
Fee 7% of rental income
Fee 0.07 $66 560
$4659.20
Rental income less fees $66 560 $4659.20
$61 900.80
Cost of owning property for 1 year
rates insurance maintenance
4 $347 $150 $750
$2288
Cost of owning the property for 4 years 4 $2288
$9152
e Calculate the agents commission.

Their agent charges a commission
of 2.5% on the rst $300 000 and
1.5% on the remainder.
Commission 2.5% of $300 000 1.5% of ($515 000

$300 000)
0.025 300 000 0.015 $215 000
$10 725
f Calculate the prot.
Profit total earnings total expenses

Profit rental income less fees sale proceeds
cost of owning property commission
cost of purchase
$61 900.80 $515 000 $9152 $10 725
$356 535
$200 488.80
total profit
Rate of return
100%
initial investment
g 1 Calculate the rate of return for

4 years.
200 488.80
100%
356 535
Rate of return 56.2%
56.2%
14.1%
4
Rate of return
2 Divide by 4 to nd yearly rate.

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16
Exercise 1B
1 Use the table on page 14 to calculate the transfer duty paid on a house that costs a buyer:
a $56 000
c $670 000
e $436 000
b $260 000
d $120 000
f $1.7 million.
2 Patrice and Gerald buy a studio unit for $140 000 (including all fees, duties and charges)
and receive $450 000 from the sale 8 years later after all commissions and fees have been
paid. During this time they have a rental tenant, paying $120 rent per week. They also pay
$57 per week body corporate fees and $234 per quarter council rates. Calculate their rate of
return per annum.
3 Stephanie and Adam purchase an inner-city apartment for $321 000. Three years later they
sell the apartment for $432 000 and pay their real estate agent 1.5% commission on the rst
$200 000 and 0.7% on the remainder of the balance. During the time they owned the house
they paid council rates of $326 per quarter and body corporate fees of $34 per week. Find:
a
b
c
d
e
f

the total costs associated with owning the property
the commission paid to the real estate agent
the total prot
4 Chris and Marieke purchase large house for $678 000. Seven years later they sell the house
for $789 000 and pay their real estate agent 1.7% commission on the rst $200 000 and
0.5% on the remainder. During the time they owned the house they paid council rates of
$426 per quarter. Find:
a
b
c
d
e
f

the total costs associated with owning the property
the total prot
5 Jason and Laura purchase a townhouse for $291 000. Three years later they sell the townhouse for $324 000 and pay their real estate agent 1.3% commission on the rst $100 000
and 0.7% on the remainder. During the time they owned the house, they paid council rates
of $526 per quarter and body corporate fees of $24 per week. Find:
a the transfer duty payable on the purchase of the property
b the total cost of purchase

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c
d
e
f
17

the total prot
6 Fabian and Ian purchase a block of land in a rural town for $84 000. Twenty years later they
sell the land to a developer for $1.2 million and pay their real estate agent 2.5% commission on the rst $500 000 and 0.6% on the remainder. During the time they owned the land
they paid average council rates of $240 per quarter. Find:
a
b
c
d
e
f

the total prot
7 Clare and Ben purchased a block of land with sea views in 2006 for $180 000. In 2009 they
sold the block for $1.1 million. Their real estate agent charged a commission of 2.5% on the
rst $500 000 of the sale price. During the time they owned the land they paid council rates of
$120 per quarter for the rst year, increasing by $20 per quarter each subsequent year. Find:
a
b
c
d
e
f

the total prot
8 Aimee and Mick inherit $200 000 and wish to invest the money. Aimee suggests that they
purchase a townhouse for $200 000 (including transfer duty) that has a guaranteed rental
income of $230 per week after management fees. Body corporate fees are $34 per week
and council rates are $356 per quarter. Mick suggests that they invest the money in a
high-interest savings account, paying compound interest of 5.4% p.a. With whom do you
agree? Justify your answer using calculations and reasoning.
M A PS
9 At a barbeque Brad brags that 10 years ago he purchased a unit for $80 000 and he recently
sold it for $160 000. Brad says that this was a return of 100% and a much better idea than
putting his money in a term deposit or savings account.
a Calculate the rate of return per annum, taking transfer duty and a commission of 2.7% of
the sale price into account.
b Under what conditions would Brad be correct about the wisdom of his investment?

ISBN 978-0-521-13560-3
18
1.3
Stock-market investments
Some companies trade on the stock market and make it possible for investors to purchase a
share of stock in that company. When an investor buys shares, they become a part-owner of
the company, and they will usually make money if the company performs well, and lose
money if the company performs badly.
The market value of shares is determined by the price at which shareholders are willing to buy
and sell. Therefore world events (such as war, recession and government policy changes) as well
as events within a company (such as restructuring, prots or losses) can affect the price of shares.
There are two main ways to make money on the stock market:
1 through capital gains, where the market value of the shares increases over time so they can
be sold for a prot
2 through dividend payments that are paid by the company to shareholders in order to
distribute part of the companys prot.
Example 10
Calculating the dividend yield from an investment
In July 2009 Amanda buys 2000 shares for $1.50 per share. The following June, Amanda is
paid a dividend of 21 cents per share. Calculate the percentage return (dividend yield) from
her investment.
Solution
The percentage return (also called
dividend yield) will be her earnings
as a percentage of her investment.
dividend
100%
cost of share
0.21

100%
1.50
14%
Percentage return
When buying and selling shares in a company, brokerage fees must be paid. These will vary
greatly depending on the method by which shares are traded. A stockbroker (the person who
trades shares on your behalf) will generally charge more than an Internet site that allows you to
buy and sell shares. The benet of a stockbroker is that they are also able to give nancial advice.
The following brokerage rates are from the Commonwealth Banks share trading site
(www.comsec.com.au).
Internet trades
Transaction amount ($)
$0 to $10 000
$10 001 to $25 000
$25 000
Brokerage
rate (%)
$19.95
$29.95
0.12
Telephone trades
Transaction amount ($)
$0 to $10 000
$10 001 to $15 000
$15 001 to $50 000
$50 001 to $80 000
$80 001 to $1 million
Over $1 million

ISBN 978-0-521-13560-3
Brokerage
rate (%)
$54.60
0.54%
0.45%
0.45%
0.40%
0.11%
19
Calculating brokerage fees
Example 11
Peter and Susan buy 4300 shares in XYZ for $3.78 each. Calculate their brokerage fee if:
a they buy the shares through CommSec using the Internet
b they buy the shares through CommSec using the telephone.
Solution
Calculate the transaction amount.
a Use the brokerage rates for

Internet trades.
b Use the brokerage rates for
telephone trades.
Transaction amount number of shares price of one share

Transaction amount 4300 $3.78
Transaction amount $16 254
Transactions between $10 001 and $25 000
have a brokerage rate of $29.95.
Transactions $15 001 $50 000 have a
brokerage rate of 0.45% of the transaction.
0.45% of $16 254 0.0045 $16 254
$73.14 (rounded to nearest cent)
Investing in the stock market can have varying degrees of risk, depending on the type of investment made. Short-term investments in one company tend to be more risky than long-term investments in a range of companies. By examining the chart of average share price movements between
1901 and 2008 below you can see that, though share prices can often fall substantially in the short
term (for example in September 2001 and late 1929), in the long-term share prices tend to rise.
7000
5000
Recession
Share market collapse
Global
financial
crisis
1000
Oil crisis
500
Oil boom
200
100
World War II
Great Depression
50
Share price movements

19002008
World War I
20
2010
2005
2000
1995
1990
1985
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
10
1980
A vertical logarithmic scale is

used to show the proportional
importance of fluctuations over
the period
1975
Share price index (logarithmic scale)
2000
Year
ISBN 978-0-521-13560-3
20
Exercise 1C
1 Calculate the brokerage on the following share transactions if they were purchased through
CommSec over the Internet:
a
b
c
d
3487 shares in DFE at $0.97 per share

7000 shares in GFD at $35.87 per share
4500 shares in DSE at $3.21 per share
10 000 shares in SWW at $98.80 per share.
2 Calculate the brokerage on the following share transactions if they were purchased through
CommSec over the telephone:
a
b
c
d
5677 shares in DGJ at $7.97 per share

700 shares in YUO at $39.87 per share
5000 shares in DSP at $3.89 per share
86 000 shares in SLW at $8.80 per share.
3 In December 2007, Juliette bought 6000 shares at the market value of $5.60 per share. The
following December she is paid a dividend of 89 cents per share. Calculate the percentage
return from her investment:
a without taking brokerage into account
b taking Internet brokerage rates into account.
4 In July 2001, Ahmed bought 4000 shares at the market value of $7.67 per share. The
following July, he is paid a dividend of 67 cents per share. Calculate the dividend yield
from his investment:
a without taking brokerage into account
b taking Internet brokerage rates into account.
5 Mary bought $3550 worth of shares in June 2006. She paid $7.10 per share. In December,
she is paid a dividend of $0.49 per share. The next June, she is paid a dividend of $0.76 per
share. Mary pays income tax of $220 on her earnings. Calculate the percentage return from
her investment, taking tax and internet brokerage fees into account.
6 Gideon invests his $50 000 inheritance in BHP shares, which are selling for $43.50 per
share at the time of purchase. How many shares can he buy if he purchases them:
a using the telephone?
b using the Internet?
7 Thomas invests all of his $34 000 savings in ABC shares, which are selling for $63.50 per
share at the time of purchase. How many shares can he buy if he purchases them:
a using the telephone?
b using the Internet?
8 Mindy buys 3000 shares in LOP at $3.76 per share. Five years later she sells them at the
market price of $5.34 per share.
a Find the share purchase amount.
ISBN 978-0-521-13560-3
b
c
d
e
f
21
Calculate the telephone brokerage on the purchase.

Find the sale amount.
Calculate the telephone brokerage on the sale.
Calculate the percentage return per annum from Mindys investment (ignoring taxes).
Mindy pays 0.42 cents capital gains tax for every dollar of prot she earns. Calculate the
percentage return per annum, taking tax into account.
9 Vanessa buys 450 shares in TOP at $8.90 per share. Five years later she sells them at the
market price of $10.34 per share.
a
b
c
d
e
f
M A PS
Find the share purchase amount.

Calculate the telephone brokerage on the purchase.
Find the sale amount.
Calculate the telephone brokerage on the sale.
Calculate the percentage return per annum from her investment (ignoring taxes).
She pays 0.42 cents capital gains tax for every dollar of prot she earns. Calculate the
percentage return per annum, taking tax into account.
10 Jesse has saved $20 000 and visits a nancial advisor

to get advice about how best to invest his money. The
nancial advisor charges Jesse $1300 for her advice,
and suggests that he invest his money in an indexed
fund. Indexed funds are a portfolio of investments
that is weighted the same as a stock-exchange index
in order to mirror its performance. Use the chart on
page 19 to decide if this would be a good:
a long-term investment (20 years)
b short-term investment (1 year).
1.4
Future and present values of investments

Some investment funds or life-insurance companies guarantee that you will receive a lumpsum payment after a certain period of time if you contribute regular payments over your
lifetime. Often this lump-sum payout occurs when you reach a certain age, for example
65 years old. The lump-sum payments these companies advertise often seem to be more than
enough money to retire on. However, ination must be taken into account when considering if
they are a wise investment or otherwise.
Example 12
Present value of a lump sum
Alfred is 45 and joins a life-insurance fund that will pay him $1.4 million when he retires at
the age of 70 years.
a What is the present value of the lump-sum payout, assuming that the ination rate is
2.5% p.a. each year?
b If Alfred pays $4500 each year for the insurance policy, is it a good investment?
ISBN 978-0-521-13560-3
22
Solution
a 1 Use the compound-interest formula to
calculate the principal that would need to
be invested with A 1.4 million,
r 2.5 and t 25.
A P a1
r t
b
100
2.5 25
1 400 000 P a1
b
100
1 400 000
p
2.5 25
a1
b
100
$755 146.825
$755 000
2 Round off to the nearest thousand dollars,

as the ination rate is a very rough estimate.
b 1 Calculate the amount Alfred pays into
the insurance policy.
2 Make a decision based on the facts.
Example 13
Amount paid $4500 25

$112 500
Alfred receives a sizable payout, enough to live on
comfortably for at least 10, perhaps 20 years or
more. He pays $112 500 all up, but receives
considerably more than this, especially as he does
not pay this all at the start, but adds into the fund
each year, effectively reducing the cost of each
payment as inflation reduces the value of his
payments. Therefore this is a good investment.
Calculating superannuation
Ishmaels superannuation fund will pay him ve times his annual wage when he retires in
40 years time. Ishmaels current wage is $54 000 and he expects it to increase by 4.5% per
year for the next 40 years.
a Find the future value of Ishmaels annual wage.
b Find the lump sum superannuation payout Ishmael receives when he retires.
c If the average ination over the next 40 years is 2.7% p.a., nd the present value of his
superannuation payout.
Solution
a 1 Use the compound interest formula to
calculate his wage in 40 years time,
using P 54 000, r 4.5, t 40

as the wage increase rate is a very rough
estimate.
b Find the lump-sum payout.
A P a1
r t
b
100
4.5 40
b
54 000 a1
100
$314 083.69
wage increase $314 000
Lump-sum payout 5 $314 000

$1.57 million

ISBN 978-0-521-13560-3
A P a1
c 1 Use the compound interest formula

(with n 1) to calculate the principal
that would need to be invested, with
A $3.14 million, r 2.7, t 40
1 570 000 P a1
23
r t
b
100
2.7 40
b
100
1 570 000
2.7 40
b
a1
100
P $540 856.3195
p

as the ination rate is a very rough estimate.
3 Give the answer as a statement.
P $541 000
The present value of the payment is
$541 000, which is equivalent to
approximately 10 years salary in todays
terms.
Exercise 1D
1 If the average ination rate is 3.1% p.a., what is the value of the following lump-sum
payouts after 10 years?
a $150 000
b $356 000
c $1.2 million
d $238 974
2 Find the future value of the following investments, assuming an average interest rate of
6.46% p.a. over 30 years:
a $1500
b $35 600
c $1.2 million
d $2384.
3 Harsha joins a life insurance fund that will pay him $120 000 when he reaches 55 years of
age. He is currently 25 years old. What is the present value of the lump-sum payout,
assuming that the average ination rate is 4.3% p.a.?
4 Julian joins a life insurance fund that will pay him $134 500 when he reaches 60 years of
age. He is currently 35 years old. What is the present value of the lump-sum payout,
5 Samantha joins a life insurance fund that will pay her $432 000 when she reaches 65 years
of age. She is currently 27 years old. What is the present value of the lump-sum payout,
6 Mackenzie joins a retirement plan that offers to pay twice her current income, per year, for
15 years, when she retires in 30 years time. In order to belong to this plan she must pay
$5000 per year until retirement. Mackenzies current income is $42 000 p.a., and the
average ination rate over the 30 years is 4.7% p.a.

ISBN 978-0-521-13560-3
24
a Find the present value of the payout in the rst year after retirement.
b Find the present value of the payout in the 15th year after retirement.
c Would you advise Mackenzie to join this retirement plan?
7 Kevins nancial advisor informs him that if he joins a life insurance plan for the next
30 years, paying $1250 per quarter, he will receive the same lump-sum payout as if he were to
now invest $40 000 in a term deposit with an interest rate of 4.5% p.a., compounded yearly.
a What lump-sum payout would Kevin receive?
b Assuming an average ination rate of 2.6%, what is the present value of the lump-sum
payout?
8 Pamelas superannuation fund will pay her ve times her annual wage when she retires in
25 years time. Her current wage is $74 000 and she expects it to increase by 3.5% per
year for the next 25 years.
a Find the lump-sum superannuation payout Pamela receives when she retires.
b If the average ination over the next 40 years is 2.9% p.a., nd the present value of her
superannuation payout.
9 Paula purchases an antique chair for $43 in 1985. The value of the chair grows by an average of 12.4% p.a. and Paula sells the chair in 2005 to an antiques dealer.
a Calculate the price the antiques dealer pays for the chair.
b Assuming ination between 1985 and 2005 was an average of 5.4% p.a., what was the
present value of this price in 1985?
M A PS
10 Anna reads the following in the nancial help webpage, moneymanager.com: Wholeof-life or endowment policies were once the avour of the month, but no more. The policy
has an investment component but most independent
studies show you will earn a higher return by taking out a
cheaper term policy and investing the difference in another
asset.
At the age of 25 years, Anna can take out a death only
policy that pays $500 000 to her nominated beneciary if
she dies before the age of 60 years, and nothing otherwise,
or an endowment policy that pays $500 000 upon death
before 65 years, or upon maturation at the age of 65 years.
The death only policy costs $23.50 per month and the
endowment policy costs $1000 per year. Which do you
think Anna should choose, and why?

ISBN 978-0-521-13560-3
1.5
25
Value of an annuity
In exercise 1D we took a quick look at investments that required a regular periodic
contribution, such as $1000 per year for 15 years. This form of investment is called an
annuity. It is important to note that payments, including the rst payment, are made at the end
of each compounding period (for example, a month or a year).
So if you were to invest $1000 for 15 years, then the rst $1000 invested would earn
interest for 14 years, the second would earn interest for 13 years, and so on. The last $1000
you invested would not earn any interest, as you would have contributed that money at the end
of the compounding period.
Example 14
Future value of an annuity
Kylie invests $500 into a fund every year for 4 years at an interest rate of 5.46% p.a.
Calculate the value of the annuity after the fourth year.
Solution
1 Use the compound-interest formula to
calculate the value to which the rst
$500 would grow (t 3).
calculate the value to which the second
calculate the value to which the third
4 Add these amounts together, with the
fourth $500, to nd the amount in the
account after 4 years.
A 500 a1
5.46 3
b
100
$586.45
A 500 a1
5.46 2
b
100
$556.09
A 500 a1
5.46 1
b
100
$527.30
Total $586.45 $556.09 $527.30 $500
$2169.84
As you can see, the method outlined in example 14 could quickly become tedious if a large
number of periodical investments are made over the term of the investment. Instead we can
use a formula to calculate the future value of our investment. The future value of an annuity
can be calculated using the following formula:
M ca 1
A
r n
b 1d
100
r
100
where M is the amount of each periodical investment, r is the interest rate per time period and
n is the number of deposits made.

ISBN 978-0-521-13560-3
26
Example 15
Future value of an annuity: by formula
Kylie invests $500 into a fund every year for 4 years at an interest rate of 5.46% p.a.
Calculate the value of the annuity after the fourth year using the future-value formula.
Mca1
Solution
1 Write down the formula.
A
r n
b 1d
100
r
100
5.46 4
b 1d
10
5.46
100
500 c a 1
2 Substitute M $500, r 5.46, n 4
A
3 Evaluate and nd the future value.
A $2196.8
Therefore, from example 15, regardless of the method we use to calculate the future value
of the annuity, we arrive at the same answer. The benet of the formula is that it is much
quicker to use, especially if a large number of deposits are to be made.
Annuities are an option that investors often take if they do not have a large lump sum of
money, but can afford to contribute a small sum of money regularly. In order to nd the large
sum of money they could have invested for the same return in the same amount of time, we
need to nd the present value of the lump-sum payout they will receive. The present value, P,
of a lump-sum payout, with rate per period of r and n deposits is given by:
Mca1
P
Example 16
r n
b 1d
100
r
r n
a1
b
100
100
Present value of an annuity: by formula
Patrick intends to invest $150 per month for 40 years in a bank account with a xed interest
rate of 4.5% p.a. What is the present value of his investment?
Solution
Mca1
1 Write down the formula.
Substitute in M $150, r 4.5,

n 12 40 480
2 Evaluate and nd the present value.
r n
b 1d
100
P
r
r n
a1
b
100
100
4.5 480
150 c a 1
b 1d
100
P
4.5
4.5 480
a1
b
100
100
P $3333.33

ISBN 978-0-521-13560-3
27
Exercise 1E
1 Use the compound-interest formula to calculate the value of an annuity when:
a $320 is invested yearly for 4 years at 3.8% p.a.
b $3000 is invested yearly for 3 years at 5.6% p.a.
c $2100 is invested semi-annually for 2 years at 4.9% p.a.
2 Use the future-value formula to check your answers to question 1.
3 Adam and Julie invest $1500 into a fund every year for 23 years at an interest rate of
7.46% p.a. Calculate the value of the annuity after the 23rd year.
4 Geoff invests $3500 into a fund every year for 31 years at an interest rate of 5.64% p.a.
Calculate the value of the annuity after the 31st year.
5 Charlotte invests $20 into a fund every month for 12 years at an interest rate of 3.58% p.a.
Calculate the value of the annuity after the 12th year.
6 Carrie and Aidan invest $750 into a fund every quarter for 10 years at an interest rate of
6.45% p.a. Calculate the value of the annuity after the 10th year.
7 Samantha intends to invest $540 per year in monthly instalmens for 40 years in a bank
account with a xed interest rate of 4.5% p.a., compounding monthly. What is the present
value of her investment?
8 Steve and Beatrice intend to invest $150 per month for 25 years in a bank account with a xed
interest rate of 6.7% p.a., compounding monthly. What is the present value of their investment?
9 Skye intends to invest $850 per quarter for 30 years in a bank account with a xed interest
rate of 5.47% p.a., compounding quarterly. What is the present value of her investment?
M A PS
10 Howard intends to invest $100 every fortnight for 15 years at an interest rate of 4.34% p.a.
What lump sum would Howard have to invest now in order to get the same payout as his
annuity?
11 Is it better to invest $350 per fortnight for 15 years at an interest rate of $8.79% p.a. or to
invest a lump sum of $45 000 for the same period of time with yearly compound interest
of 5.68% p.a.? Justify your answer using calculations and logic.
1.6
Making nancial decisions

If you suddenly won a prize of $100 000 what would you do with the money? You could:
spend the money on goods or services that will
not hold their value (cars, holidays, dining out,
entertainment, computers, video games)
spend the money on goods that may increase in
value (real estate, artwork, antiques)
invest the money in shares, bonds or in a bank
account.
By making informed nancial decisions you can
enjoy life while watching your money grow.

ISBN 978-0-521-13560-3
28
Example 17
Risk and return
Peter inherits $120 000 and considers three options for investing the money: buying real
estate, buying shares or investing his money in a term deposit that pays 5.4% p.a. simple
interest. What option should he choose if he wants to be able to access his earnings in:
a 3 years?
b 20 years?
Solution
a Term deposit is low risk.
Shares and property have higher
short-term risk.
Though the term deposit will not necessarily give

him the highest yield, the interest is guaranteed
and so for such a short-term investment this is the
best option, as fluctuations in the share and real
estate market could lead to losses over the short
term.
b Term deposit is low risk but has low

returns.
Shares vary in risk depending on what
is purchased and can give high returns.
Property generally appreciates over time.
Over a longer time frame the property and shares

options have lower risk, as the general trend in these
markets is for the price to rise in the long term. Some
well-chosen shares, an indexed or managed fund, or
a property investment may well result in a higher yield.
If Peter wanted to take a more conservative approach
he could invest a portion of his money in shares, and
another portion in the term deposit.
Remember that the higher the potential return, the higher is the risk that you may lose all
your money.
Example 18
Rates of return
Rob and Gill are twin brothers and on their 21st birthdays their father gives them each
$30 000 to invest as they see t.
Rob invests his $30 000 in a managed fund that costs him $320 per year in fees to his
nancial advisor. The rst year he receives a dividend of $2378, the second year he receives a
dividend of $1700 and the third year he receives a dividend of $5780. Due to an economic
slowdown he receives only $120 in dividend in the fourth year. At the end of the fourth year
his investment is worth $28 000 due to a decline in share prices.
Gill invests his money in an account that pays variable compound interest, monthly. At the
end of the 4 years Gill has $39 120 in his account.

ISBN 978-0-521-13560-3
29
a Calculate the average percentage return for:

i Rob
ii Gill.
b Who is ahead after 4 years?
c Who do you think made the better long-term investment?
Solution
a i Rob
1 Calculate Robs prot.
2 Calculate the percentage return

over 4 years.

over 1 year.
ii Gill
1 Calculate Gills prot.

over 4 years.

over 1 year.
b The brother with the higher percentage
return is ahead.
c Though a higher risk investment,
investing in a managed fund will
probably give larger returns in the
long term.
Profit income expenses

Income $2378 $1700 $5780 $120
$28 000
$37 978
Expenses $30 000 ($320 4)
$31 280
Profit $37 978 $31 280
$6698
profit
initial investment
6698
Percentage return
100%
30 000
Percentage return 22.33%
22.33%
Percentage return p.a.
4
5.58%
Profit income expenses
Profit $39 120 $30 000
Profit $9120
Percentage return
profit
initial investment
9120
Percentage return
100%
30 000
30.40%
30.40%
Percentage return p.a.
4
7.60%
Gill is ahead.
Percentage return
Rob will probably be ahead in the long term.

ISBN 978-0-521-13560-3
30
Exercise 1F
M A PS
1 For each of the following cases recommend a type of investment, justifying your choice in
terms of initial outlay, risk and predicted return.
a
b
c
d
e
M A PS
An investor is seeking a long-term investment with a regular income.

An investor is seeking a short-term investment that maximises prot.
An investor is seeking to double her money over the course of a month.
An investor is seeking a secure investment that will increase his money over time.
An investor does not have a large lump sum, but can afford to invest $300 every
month.
2 For each scenario below, choose the best investment option for $200 000, justifying your
choice in terms of time frames, risk and return:
a a term deposit, paying 5.67% p.a. or a savings account, paying 4.68% p.a., compounded
monthly
b 4000 shares in HJT, the value of which is predicted to rise by 14% each year for the next
5 years or 8000 shares in URF, the value of which is predicted to rise in value by 3%
each year for the next 3 years, and which is expected to pay a dividend of $0.98 per share
every year.
c a home unit, with rental income of $340 per week and total yearly expenses of $4300 or
a term deposit paying 7.5% p.a.
d a managed fund, with fees of $430 per year and returns of 19% over the past 4 years or a
block of land in a coastal town, where property prices are predicted to rise by 20% in the
next 3 years.
M A PS
3 Bobbie and Sara are friends who have a competition to see how much money they can each
make from $150 000 over 5 years.
Bobbie invests all her money in the purchase of an inner-city apartment (fees and taxes
included) which she sells 5 years later for $210 000 less a commission of 1.7%. She pays
body corporate fees of $43 per fortnight and rents it to a tenant for $125 per week.
Sara invests $50 000 of her money in an indexed fund, which grows to $76 000 in
5 years. She also invests $100 000 in a term deposit that pays 6.7% simple interest upon
maturity.
a What is the average percentage return for:
i Bobbie?
ii Sara?
b Who is ahead after 5 years?
c Who do you think made the better long-term investment?
d Who do you think made the better short-term investment?

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31
Research task
1 What category of investments (for example, real estate, shares, bonds and savings
accounts) performed well during the last year? When averaged over the last 5 years is your
answer the same?
2 What happens to the risk of an investment as the time frame increases?
3 Is this always the case? Can you think of some exceptions?

ISBN 978-0-521-13560-3
32
Spreadsheet activities: Managing money

Activity 1: Compound interest with variable interest rates
This activity will model the growth of money in a high-interest savings account over a long
period of time. Interest rates are often variable, meaning that the bank can decide to change
the rate paid to the investor, depending on market forces and Reserve Bank policy. This
activity will model the growth of an investment where interest is calculated daily and paid
monthly according to a variable interest rate.
Step 1 Open the spreadsheet for chapter 1 on the student disk, or start new spreadsheet and
enter the titles in the corresponding cells displayed in the screenshot below.
Step 2
Using the Format MenuCells, apply Currency formatting to Columns D:G shown
below, left. Apply Custom formatting set to mmm-yy to Column B, shown below,
right. Column C retains the default General setting.
Step 3
Enter the following data (which is modelled on actual uctuations in interest rates
between 2006 and 2008) in cells B3 to B38 (Date) and C3 to C38 (Interest rate).
You can do this quickly with the Fill Down command: enter Jan-06 in cell B3, select
the cell and drag the small square on its bottom-right border down to B39 so that the
last date to appear is Jan-09.

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Date
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Step 4
Step 5
Step 6
Step 7
Step 8
Step 9
Step 10
Interest rate
(% p.a.)
5.3
5.3
5.3
5.3
5.55
5.55
5.55
5.8
5.8
5.8
6.05
6.05
Date
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Interest rate
(% p.a.)
6.05
6.05
6.05
6.05
6.05
6.05
6.05
6.3
6.3
6.3
6.55
6.55
Date
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan 09
33
Interest rate
6.7
7.0
7.35
7.45
7.45
7.45
7.45
7.45
7.3
6.57
5.31
4.64
Enter A2*C3/100*(B4-B3)/365 into D3. This formula calculates the interest paid for
January 2006. Now enter D3A2 into E3, giving the balance of the account at the
end of the rst month.
Enter E3*C4/100*(B5-B4)/365 into D4, which gives the interest earned for February
2006. Now Fill down from D4 to D38.
Enter E3D4 into E4 to calculate the balance of the account at the end of February.
Fill down from E4 to E38.
In F3 type A2*H1/100*(B4-B3)/365. This calculates the interest paid in January
2006. To calculate the balance at the end of January, type A2F3 into cell G3.
To calculate the interest paid for February, type G3*H$1/100*(B5-B4)/365 into F4
and Fill down to F38.
Type F4G3 into G4 to calculate the balance at the end of February. Fill down to
G38.
Enter values for the principal in A2 and the xed interest rate in H1. Use a principal
of $1000 and a rate of 6% p.a. to start off with.

ISBN 978-0-521-13560-3
34
Examine the results, noting whether the variable or the xed rate has paid more.
Activity 2: Graphing the differences in balances over time

To build on our current le, we are going to create a graph to show the effects of variable
interest rates on an investment.
Step 1 Select cells B2 to B38, then hold the Control button and select cells E2 to E38 and
G2 to G38.
Step 2 Now click the Chart Wizard icon on the Toolbar.
Step 3 Choose the XY (Scatter) graph type as in the following screenshot.

ISBN 978-0-521-13560-3
35
Step 4
Step 5
Click Next and then Next again.

Enter a title for the chart and labels for your x and y axes, as below.
Step 6
Choose if youd like the chart on a separate page or the given page. If you are using
the spreadsheet from the student disk, place the chart in the spreadsheet Balances
over time.
Step 7 You should now have a graphical comparison of the balance of an investors
account, depending on whether they invested in an account with a xed rate of
6% p.a. or a variable account with an initial rate of 5.3% p.a. Enlarge the chart so
that you can examine the results more closely. Then change each of the legends to
represent the xed and variable data sets. You can change the legends, by changing
the labels in cells E2 and G2 to Variable Rate Account Amount and Fixed Rate
Account Amount.

ISBN 978-0-521-13560-3
36
$1,250.00
Variable vs fixed interest
Account balance
$1,200.00
$1,150.00
$1,100.00
$1,050.00
$1,000.00
$950.00
Sep- Mar- Oct- Apr- Nov- Jun- Dec- Jul05 06 06 07 07 08 08 09
Date
Variable Rate Account Amount
Fixed Rate Account Amount
1 Which was the best investment?
a Over 1 year
b Over 2 years
c Over 3 years
2 Go back to the compound interest spreadsheet and change the principal to $2500 and the
xed rate to 7.25%.
a How much is in the account in December 2008 using the variable rate?
b How much is in the account in December 2008 using the xed rate?
Activity 3: Extension
1 Investigate the effect on the graph of changing the xed interest rate. What is the lowest
xed interest rate (to two decimal places) that will give a better investment over 3 years?
2 Modify the sheet so that interest is paid only half-yearly into the xed account, making it
more like a term deposit. What effect does this have on the graph? Is the lowest xed interest rate that will give a better investment over 3 years the same as in question 1?
3 Create a spreadsheet that models an annuity, where payments are made at the end of each
year for 10 years and interest is:
a xed
b variable.

ISBN 978-0-521-13560-3
Term deposits
These generally have higher interest rates than savings accounts.

Money is generally locked in for a xed term, and a fee will apply
to access the money.
Simple interest is usually paid upon maturation (the end of the term),
but interest may be paid quarterly, half-yearly or even monthly,
sometimes with the option to pay the interest back into the term
deposit.
Review
Key ideas and chapter summary
37
The interest rate is xed for the term of the deposit.

Simple interest
This is paid on an investment or loan on the basis of the original

Prt
amount invested. It is given by I
where the amount invested
100
or borrowed (P) is known as the principal, r is the interest rate and
t is the time (in years).
Savings accounts
In these accounts, money is generally easily accessible.

Interest is often calculated daily and paid monthly, and therefore
compounds.
Interest may be paid on whole sum, or only on parts over a certain
value.
Fees may apply.
The interest rate may be variable.
Compound interest
Interest is compounded when the interest paid on a loan or investment is credited to the account, and the interest for the next period is
based on the sum of the principal and interest earned. The amount
of the investment is given by
A P a1
r>n nt
b
100
where $A the amount of the investment after t years

$P the initial amount
r the interest rate per annum
n the number of times per year interest is compounded
t the number of years.
Real-estate investment
People generally invest in real estate for two reasons: they expect the
value of the real estate to increase (capital gain) and for rental income.
However, there are costs associated with real-estate investment,
including commissions, taxes, fees, maintenance and rates.

ISBN 978-0-521-13560-3
Review
38
Commission
This is a fee paid to a real-estate agent by the seller. It is generally a

percentage of the sale price.
Transfer duty
This is a tax paid by the buyer to the state government upon their
purchase of a house. Current transfer duty charges can be found on
page 14.
Rates
These are a tax paid to the local government by people who own
property.
Body corporate fees
These are fees paid to the body corporate of a unit, apartment or

townhouse complex, in order to maintain common property.
Common property includes external walls, gardens, paths, pools,
gyms and elevators.
This is calculated by dividing the rate of return on the investment by

the number of years for which the investment has been held.
profit
100%
initial cost number of years
Stock market
This is the market on which stocks or shares are bought and sold.
Share
This is a stake in a company. If a person owns shares in a company

they own a part of that company. The more shares they own, the
more of the company they own.
Brokerage fees
These are fees paid to a broker by a buyer or seller of shares for the
brokers services in effecting the sale.
Risk
This is the likelihood that an investment may lose money for the
investor. Investing in term deposits and savings accounts is
generally considered low-risk. Investments in property or shares in
reputable, established companies are generally seen as medium-risk
and investments in some shares can be considered high-risk.
Present value of an
investment
This is the principal that would need to be invested now in order to

give the same payout as an annuity in a certain number of years time.
If the lump-sum amount is known, the compound-interest formula
can be rearranged to nd the present value.
P
A
r/n nt
a1
b
100
For an annuity, the present value, P, of a lump-sum payout, with rate

per period of r and n deposits is given by:
Mca1
P
r n
b 1d
100
r
r n
a1
b
100
100

ISBN 978-0-521-13560-3
The amount to which an investment will grow in a certain number of

years time. If the investment is not an annuity then the compoundinterest formula can be used to calculate the future value.
A P a1
r>n nt
b
100
The future value of an annuity can be calculated using the formula:

Mca1
A
Review
Future value of an
investment
39
r n
b 1d
100
r
100
where M is the amount of each periodical investment, r is the

interest rate per time period and n is the number of deposits made.
Making nancial
decisions
When making decisions about how to invest your money you should
consider:
the mount of money you have available
the risk of the investments
the potential return of the investments.
Skills check
Having completed this topic you should be able to:
calculate interest earned on term deposits
calculate interest earned on savings accounts
use the compound-interest formula to calculate the principal, interest rate, time or nal
amount in the account when given the compounding period and three other variables
use tables and other information to calculate the cost of buying, selling and owning
houses
calculate the yearly rate of return of investments
use tables and other information to calculate the costs of buying and selling shares.
calculate dividend yield
calculate future and present values of investments including annuities
compare investments, justifying your choice in terms of affordability, risk and returns.
Multiple-choice questions
1 What is the biggest advantage of a term deposit over a savings account?
A Interest is always paid as compound interest.
B Interest is usually paid as simple interest.
C The interest rate is guaranteed for the term of the investment.
D The investment cannot be accessed if money is needed desperately.
E It is a low-risk investment.
ISBN 978-0-521-13560-3
Review
40
2 Jodie deposited $1250 in a xed-term deposit account with a simple interest rate
of 634 % per annum. She withdrew her money after it had earned $140.63 in
interest. For how many months had her money been invested?
A 68 months
B 80 months
C 20 months
D 18 months
E 1 month
3 A sum of $20 000 is invested in a savings account for a period of 5 years, at an
interest rate of 12% per annum, compounded quarterly. Find the interest earned.
A $16 122.22
B $15 246.83
C $36 122.22
D $12 000
E $35 246.83
4 How much money must you deposit at a xed rate of 6.4% per annum compounded
yearly if you require $42 000 in 4 years time?
A $9229
B $53 829
C $30 000
D $32 770
E $19 000
5 Guy wishes to invest $4300 for 5 years. Which of the following is his best option?
A 8.7% per annum, interest compounded weekly
B 8.9% per annum, interest compounded quarterly
C 9.3% per annum, simple interest in a term deposit, interest paid on maturity
D 8.1% per annum, interest compounded daily
E 8.8% per annum, interest compounded monthly
6 Use the table on page 14 to calculate the transfer duty payable on the purchase of a unit
worth $432 000.
A $15 120
B $11 200
C $13 545
D $9720
E $6480
7 Sally sells her unit for $320 000 and must pay her real-estate agent a commission of
1.2% of the rst $250 000 and then 0.7% thereafter. What commission does she pay?
A $1000
B $3840
C $52 000
D $3000
E $3490
8 What is brokerage?
A A fee paid only by buyers of shares to their stockbrokers
B A fee paid only by sellers of shares to their stockbrokers
C A tax paid to the government when you buy shares
D A fee paid by both buyers and sellers to their stockbrokers
E A tax paid on dividends received

ISBN 978-0-521-13560-3
41
10 What is the percentage return from Pauls investment taking internet brokerage rates
into account (use the table on page 18)?
A 7.96%
B 14.92%
C 12.71%
D 19.95%
E 6.27%
Review
9 In December 2005 Paul bought 100 shares at the market value of $9.60 per share.
The following December, he is paid a dividend of 78 cents per share. Calculate
the percentage return from his investment without taking brokerage into account.
A 12.3%
B 7.912%
C 8.125%
D 11.792%
E 19.471%
11 Simeon joins a life insurance fund that will pay him $300 000 when he reaches 55
years of age. He is currently 21 years old. What is the present value of the lump-sum
payout, assuming that the average ination rate is 4.3% p.a.?
A $1.26 million
B $47 000
C $71 700
D $97 000
E $121 000
12 Hercules invests $6500 into a fund every year for 25 years at an interest rate of 4.64%
p.a. Calculate the value of the annuity after the 25th year.
A $295263.90
B $137 000.45
C $416 045.59
D $957 057.92
E $492 897.94
Short-response questions
1 How long will it take for $5000 to double if it is invested at 6.5% per annum
compounded every 6 months? Give your answer to the nearest year.
2 Annette has borrowed $5485 from her friend, Kelly, to buy a new car. Kelly agrees
to accept a repayment of $6000 at the end of 1 year. Suppose the money could
have been left in the bank, accumulating interest at a rate of r% per annum
compounding monthly. What annual interest rate would Kelly need to get from the
bank, to achieve the same return as she will from Annette (to the nearest whole
number)?
3 Hugo buys a studio unit for $170 000 (including all fees, duties and charges) and
receives $250 000 from the sale 8 years later after all commissions and fees have been
paid. He paid $57 per week body corporate fees and $234 per quarter for council rates.
Calculate his rate of return per annum.
4 Penelope and Sara purchased a block of land in 2003 for $280 000. In 2010 they sold
the block for $890 000. Their real estate agent charged a commission of 2.5% on the
rst $500 000 of the sale price. During the time they owned the land, they paid council

ISBN 978-0-521-13560-3
Review
42
rates of $320 per quarter for the rst year, increasing every year by $10 per
quarter. Find:
a the transfer duty payable on the purchase of the property
b the total cost of purchase
c total costs associated with owning the property
d the commission paid to the real estate agent
e the total prot
f the yearly rate of return.
5 Maria bought shares in June 2004 for $6546.20. She paid $7.10 per share. In
December, she is paid a dividend of $0.38 per share. The next June she is paid a
dividend of $0.79 per share. Maria pays income tax of $220 on her earnings. Calculate
the percentage return from her investment, taking tax and internet brokerage fees
into account.
6 Canary joins a retirement plan that offers to pay 1.5 times her current income,
per year, for 20 years, when she retires in 20 years time. In order to belong to
this plan, she must pay $4000 per year until retirement. Canarys current
income is $42 000 p.a., and the average ination rate over the 20 years was
4.7% p.a.
a Find the present value of the payout in the rst year after retirement.
b Find the present value of the payout in the 10th year after retirement.
c Would you advise Canary to join this retirement plan?
7 Ginger invests $2750 into a fund quarterly for 15 years at an interest rate of
4.45% p.a., compounding quarterly. Calculate the value of the annuity after the
15th year.
8 Nancy intends to invest $400 per year in equal monthly instalments for 30 years in a
bank account with a xed interest rate of 3.45% p.a., compounding monthly. What is
the present value of her investment?
M A PS
9 Emilio and Doug are investment partners. They have $100 000 to invest. They each
propose a different investment for a 10-year term.
Emilio wants to invest all the money in a compound-interest savings account,
paying 5.6% p.a. interest. A $5 per month account-keeping fee applies to this
account.
Doug would prefer to invest the money in an indexed fund. He says that the past
performance of such funds have shown them to grow on average by 12% per year over
the last 10 years. No brokerage fees are payable, but a one-off establishment fee of
$250 applies.
Which proposal do you think is better?

ISBN 978-0-521-13560-3
10 Chandler and Monica write a budget and discover they have $450 spare each month.
They decide to invest this money.
Chandler wants to invest the money in a high-interest savings account, which pays
5.6% p.a. interest, compounding monthly. Monica would rather buy shares, which
cost $4.00 each, in YRP each month. Her broker says he will charge them $10 for
each purchase. YRP had a dividend yield last year of 12.9%. Which proposal would
you choose? Would it matter if the investment was a long-term or short-term
investment?

ISBN 978-0-521-13560-3
Review
M A PS
43

QMA12 Ch1

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9780521135603c01_p01-43.

qxd 8/16/09 3:08 PM Page 1 User Mac OS:Desktop Folder:Ranjan: Aptara

Savings accounts and term deposits

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 2 User Mac OS:Desktop Folder:Ranjan: Aptara

Cambridge Queensland Mathematics A Year 12

Recall that for simple interest:

Simple interest: term deposits

Calculating the total amount invested

A P I 16 000 2560 $18 560

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 3 User Mac OS:Desktop Folder:Ranjan: Aptara

Chapter 1 Managing money 1: Investing for the future

Calculating the principal invested: simple interest

2 Here we are not given the value of the interest

3 Divide 50 000 by 1.155 to nd P.

where $A the amount of the investment after t years

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 4 User Mac OS:Desktop Folder:Ranjan: Aptara

Cambridge Queensland Mathematics A Year 12

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 5 User Mac OS:Desktop Folder:Ranjan: Aptara

Chapter 1 Managing money 1: Investing for the future

3 The equation we wish to enter into the calculator is:

This needs to be rearranged so that the left side of the

4 Press ENTER to obtain the window shown.

5 If you now enter values for any four of P, r, n, t or A,

6 (Optional step) You can speed up the calculation by giving

7 Move the cursor to A, and press ALPHA SOLVE. The value of

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 6 User Mac OS:Desktop Folder:Ranjan: Aptara

Cambridge Queensland Mathematics A Year 12

Calculating the time period for an investment

2 Now we need to use a special relationship

Dividing both sides by 1000 gives us:

in the form B C d, we can rewrite it as d

12t 83.985 569 76 ...

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 7 User Mac OS:Desktop Folder:Ranjan: Aptara

Chapter 1 Managing money 1: Investing for the future

Solution 2 Graphics calculator

2 Move the cursor to t, and select ALPHA SOLVE.

Find the interest rate for an investment

1 In this example where A 2123.40, P 2000,

4 Take the 12th root of both sides.

5 Subtract 1 from both sides.

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 8 User Mac OS:Desktop Folder:Ranjan: Aptara

Cambridge Queensland Mathematics A Year 12

Solution 2 Graphics calculator

2 Move the cursor to r, and select ALPHA SOLVE. The interest

Answer: 6.00% per annum

4000 7.79 4 (days)

Mike Cujes, Diana Smith 2009

Cambridge University Press

9780521135603c01_p01-43.qxd 8/16/09 3:08 PM Page 9 User Mac OS:Desktop Folder:Ranjan: Aptara

Profit total earnings total expenses