Reducing Balance Loans

Chapter 15 FM Page 711 Monday, November 13, 2000 3:36 PM
15
Reducing
balance
loans
VCE coverage
Area of study
Units 3 & 4 Business
related
mathematics
In this chapter
15A Loan schedules
15B The annuities formula
15C Number of repayments
15D Effects of changing the
repayment
15E Frequency of
repayments
15F Changing the rate
15G Reducing balance and
flat rate loans
712 Further Mathematics
Introduction
When we invest money with a financial institution the institution pays us interest
because it is using our money to lend to others. Conversely, when we borrow
money from an institution we are using the institutions money and so it charges
us interest.
In reducing balance loans, interest is usually charged every month by the finan-
cial institution and repayments are made by the borrower also on a regular basis.
These repayments nearly always amount to more than the interest for the same
period of time and so the amount still owing is reduced. Since the amount still
owing is continually decreasing and interest is calculated on a daily balance but
debited monthly, the amount of interest charged decreases as well throughout the
life of the loan.
This means that less of the amount borrowed is paid off
Amount owing
p
in the early stages of the loan compared to the end.
If we graphed the amount owing against time for a loan
it would look like the graph at right. That is, the rate at
which the loan is paid off increases as the loan progresses.
Time
The terms below are often used when talking about reducing balance loans:
Principal, P = amount borrowed ($)
Balance, A = amount still owing ($)
Term = life of the loan (years)
To discharge a loan = to pay off a loan (that is A = $0)
It is possible to have an interest only loan account whereby the repayments

equal the interest added and so the balance doesnt reduce. This option is available
to a borrower who wants to make the smallest repayment possible.
Though the focus of this chapter is reducing balance loans, note that the theory
behind reducing balance loans can also be applied to other situations such as
superannuation payouts, for people during retirement, and bursaries. In each of
these situations a lump sum is realised at the start of a period of time and regular
payments are made during that time. Regular payments are called annuities. So
these situations are often called annuities in arrears because the annuity follows
the realisation of the lump sum.
Chapter 15 Reducing balance loans 713

Loan schedules
The first amount of interest is added to the balance of a loan account one month after
the funds are provided to the customer. The first repayment is usually made on the
same day.
Consider a loan of $800 that is repaid in 5 monthly instalments of $165.81 at an
interest rate of 1.2% per month, interest debited each month. A loan schedule can be
drawn for this information, showing all interest debits and repayments.
From the schedule the amount owing after each month is shown and the total interest
charged can be calculated.
For any period of the loan:
Total repayments = Interest paid + Principal repaid
Interest
(1.2% of
Balance at monthly Total owing Balance
start of starting at end of after
month balance) month Repayment repayment
Month ($) ($) ($) ($) ($)
1 800.00 9.60 809.60 165.81 643.79
2 643.79 7.73 651.52 165.81 485.71
3 485.71 5.83 491.54 165.81 325.73
4 325.73 3.91 329.64 165.81 163.83
5 163.83 1.97 165.80 165.80 0.00
Each month interest of 1.2% of the monthly starting balance is added to that balance
and the repayment value is subtracted, leaving the starting balance for the next month.
This process continues until the loan is paid off after the 5 months.
Note that the amount of interest charged falls each month and so the amount of
principal paid each month increases as outlined earlier.
Another method can be used to analyse this account, but it doesnt display interest amounts.
Since the interest rate is 1.2% per month the balance increases by this rate each
month. Recalling the work covered in the previous chapter about the growth factor, we
can write:
r
Growth factor, R = 1 + --------- where 1 represents the original amount and
100
=1+ 1.2
---------
100
r represents the increase per period
= 1.012
So:
Balance at start of second month = balance at start of first month R repayment
A2 = 1 R Q
where Q is the regular repayment.
WORKED Example 1
An $800 loan is repaid in 5 monthly instalments of $165.81 at an interest rate of 1.2% per
month, interest debited each month. Calculate:
a the amount still owing after the 4th month
b the total interest charged during the 5 months.
THINK WRITE
r
a 1 Calculate the growth factor. a R = 1 + ---------
100
r
R = 1 + --------- 1.2
= 1 + ---------
100 100
= 1.012
2 Find the balance, A1, at the start of the A1 = A0 R Q
2nd month. = 800(1.012) 165.81
A0 = starting principal A1 = $643.79
A0 = $800
3 Find the balance, A2, at start of the 3rd A2 = A1 R Q
month. = 643.79(1.012) 165.81
A2 = $485.71
4 Continue this process to find A3, A4 A3 = A2 R Q
and A5. = 485.71(1.012) 165.81
A3 = $325.73
A4 = A3 R Q
= 325.73(1.012) 165.81
A4 = $163.83
5 The amount still owing at the end of the The amount still owing at the end of the
4th month is A4. 4th month is $163.83
b Total interest = Total repayments b Total interest = 165.81 5 800
Principal repaid = 829.05 800
= $29.05
As mentioned earlier, institutions usually debit a loan account with interest each
month. In this chapter we also consider situations in which interest is debited fortnightly
and quarterly. The frequency with which a customer can make repayments may be
weekly, fortnightly or monthly, and we also consider quarterly repayments.
In all cases in this chapter the frequency of debiting interest will be the same as the
frequency of making repayments, although this is not necessary in practice. It simply
makes calculations easier.
The calculations outlined for monthly repayments would follow exactly the same
pattern for other repayment frequencies.
In worked example 1, the loan was paid off with only a few repayments. In practice,
the repayment of most loans takes considerably longer than this. The process outlined
in the example continues throughout any part of the term of the loan.

WORKED Example 2
A loan of $16 000 is repaid by monthly instalments of $430.83 over 4 years at an interest
rate of 1.1% per month, interest debited monthly. Calculate:
a the amount still owing after the 5th repayment
b the decrease in the principal during the first 5 repayments
c the interest charged during this time.
THINK WRITE
a r
1 Calculate the growth factor, R. a R = 1 + ---------
100
1.1
= 1 + ---------
100
= 1.011
2 Find the balance, A1, at the end of the A1 = A0 R Q

1st month (or the start of the 2nd = 16 000(1.011) 430.83
month). A1 = $15 745.17
A0 = 16 000, Q = 430.83.
3 (a) Find A2 from A1. A2 = A1 R Q

(b) Repeat until A5 is found. = 15 745.17(1.011) 430.83
(A5 is the balance at the end of the A2 = $15 487.54
5th month.) A3 = 15 487.54(1.011) 430.83
= $15 227.07
A4 = 15 227.07(1.011) 430.83
= $14 963.74
A5 = 14 963.74(1.011) 430.83
= $14 697.51
4 Write a statement. The amount owing after 5 months is

$14 697.51.
b 1 The decrease in the principal is the b Decrease in principal

difference between the amount owing = A0 A5
initially, A0, and after the 5th month, A5. = 16 000 14 697.51
= $1302.49
2 Write a statement. The principal has decreased by

$1302.49 in the first 5 months of
the loan.
c 1 Interest charged = Total repayments c Interest charged = 430.83 5 1302.49

Principal repaid = $851.66
2 Write a statement. The interest charged during the first

5 months is $851.66.
More often than not a financial institution provides the nominal interest rate per year
rather than the interest rate per period. As outlined in the previous chapter in the com-
pound interest formula section, the rate per period can be obtained from the nominal
annual rate as follows:
Nominal interest rate per annum
Interest rate per period, r = -------------------------------------------------------------------------------------
Number of interest periods per year
It is important to note that while a loan can be drawn at a certain interest rate, that
rate will generally not remain the same for the life of the loan. This means that when
we consider borrowing we should be aware that the amount of the repayments may
increase (due to an increase in the interest rate) during the term of the loan and we
should be confident that repayments can be met even if the rate rises.
It has been said that if a potential borrower can maintain repayments for a rate of
11% p.a. over the term of the loan then the borrower can withstand rate changes that
may range from perhaps 5% p.a. to 17% p.a.
Let us now look at how quickly the principal decreases at the end of a loan compared
with the earlier stages.
WORKED Example 3
a A family take out a loan of $40 000 to extend their home. The loan is made at a rate of
interest of 10% p.a. (debited monthly) and is repaid over 10 years by monthly instal-
ments of $528.60. For the 3rd repayment find:
i the amount of principal repaid
ii the amount of interest paid.
b After 8 years the amount still owing is $11 455.71. Assuming the same conditions apply
as in part a, for the 97th repayment find:
i the principal repaid
ii the interest paid.
THINK WRITE
10
a i 1 Calculate the monthly interest rate, r. a i r = ------
12
= 0.833 33% per month
2 (a) Calculate the monthly growth r
R = 1 + ---------
factor, R. 100
(b) Store in your calculator memory
0.833 33
if it is recurring. = 1 + --------------------
100
= 1.008 333 3
3 Calculate the amount owing after A1 = A0 R Q
each of the first 3 months A1, A2 = 40 000(1.008 333 3) 528.60
and A3. A1 = $39 804.73
A2 = 39 804.73(1.008 333 3) 528.60
= $39 607.84
A3 = 39 607.84(1.008 333 3) 528.60
= $39 409.31

THINK WRITE
4 Principal repaid = A2 A3 Principal repaid = 39 607.84 39 409.31

(3rd repayment) = $198.53
ii Interest paid = Total repayments ii Interest = 528.60 1 198.53
b i 1 Monthly repayment = b i A97 = A96 R Q
8 years 12 payments/year = 96. = 11 455.71(1.008 333 3) 528.60
So, A96 = $11 455.71. Find A97. = $11 022.57
2 Principal repaid = A96 A97 Principal repaid = 11 455.71 11 022.57
(97th repayment) = $433.14
ii Interest paid = Repayments ii Interest = 528.60 433.14
As mentioned in the introduction, a greater percentage of each repayment made in

the early part of a loan is interest, compared with the repayments toward the end. This
is confirmed by the calculations made in the last example.
In summary, with each of 120 repayments being $528.60;
for the 3rd repayment: interest = $330.07, principal repaid = $198.53
for the 97th repayment: interest = $95.46, principal repaid = $433.14.
That is, the principal decreases faster towards the end of the loan.
remember
remember
1. In a loan schedule:
(a) the interest charged each period increases the amount owed
(b) the repayment each period decreases the amount owed.
r
2. Growth factor, R = 1 + --------- where 1 represents the original amount and
100
r represents the increase per period in %.
3. Balance at the end of the month = balance at start of the month R Q

An + 1 = An R Q where Q = repayment
4. Total repayments = Interest paid + Principal repaid
Nominal interest rate per annum

5. Interest rate per period, r = -----------------------------------------------------------------------------------
Number of interst periods per year
15A Loan schedules
WORKED 1 A loan of $1000 is repaid in five monthly instalments of $206.04 at a rate of

Example
1 1% per month, interest debited monthly. Calculate:
reads d
L Sp he hca b the total interest charged during the 5 months.
et
Mat
EXCE
2 Dimitri takes out a loan of $1500 and repays it in five monthly instalments of
Reducing balance loans $309.97 at a rate of 1.1% per month, interest debited monthly. Calculate:
b the total interest charged during the 5 months.
3 A loan of $2000 is repaid in four quarterly instalments of $525.25 at a rate of

2% per quarter, interest debited quarterly. Calculate:
a the amount still owing after the 3rd repayment
b the total interest charged during the 4 quarters.
4 Gaetana borrows $900 which she repays in five quarterly instalments of $193.72 at
a rate of 2.5% per quarter, interest debited quarterly. Calculate:
b the total interest charged during the
5 quarters.
5 Joshs loan of $3000 is repaid in four half-

yearly instalments of $807.08 at a rate of
3% per half-year, interest debited half-yearly.
Calculate:
a the amount still owing after the
3rd repayment
b total interest charged during the
4 repayments.
6 Rebecca takes out a loan of

$2500 to purchase a
new computer. The
loan is repaid
in four
6-monthly
instalments of
$696.86 at a rate of
4.5% per 6-months, interest
debited 6-monthly. Calculate:
a the amount still owing after the
3rd repayment
b the total interest charged during the
4 repayments.

WORKED 7 a A loan of $20 000 is repaid by monthly instalments of $444.89 over 5 years at an
Example
interest rate of 1% per month, interest debited monthly. Calculate:
2
i the amount still owing after the 5th repayment
ii the decrease in the principal during the first 5 repayments
iii the interest charged during this time.
b A loan of $20 000 is repaid by quarterly instalments of $1344.31 over 5 years at
an interest rate of 3% per quarter, interest debited quarterly. Calculate:
8 a Jose borrows $30 000 which he repays in fortnightly instalments of $206.45 over
10 years at an interest rate of 0.5% per fortnight, interest debited fortnightly.
Calculate:
b A loan of $30 000 is repaid by quarterly instalments of $1350.84 over 10 years at
an interest rate of 3.25% per quarter, interest debited quarterly. Calculate:
9 a Angela takes out a loan of $20 000 to set up a catering business. The loan is repaid
by monthly instalments of $664.29 over 3 years at an interest rate of 1% per
month, interest debited monthly. Calculate:
b Emad borrows $20 000 to establish a pet-minding business. The loan is repaid by
monthly instalments of $325.06 over 8 years at an interest rate of 1% per month,
interest debited monthly. Calculate:
c Hank takes out a loan of $20 000 which he repays in monthly instalments of
$286.94 over 10 years at an interest rate of 1% per month, interest debited
monthly. Calculate:
d In parts ac above the three loan accounts are the same except for the term. As the
term of the loan increases how does this affect:
i the repayment?
ii the amount still owing after the 5th repayment?
iii the amount of interest paid during the 5 repayments?
10 a Jaques borrows $30 000 which he repays in quarterly instalments of $1373.05

over 8 years at an interest rate of 2.5% per quarter, interest debited quarterly.
Calculate:
b Isabel borrows $30 000 and repays it by quarterly instalments of $1195.09 over 10
years at an interest rate of 2.5% per quarter, interest debited quarterly. Calculate:
c George takes out a loan of $30 000 which he repays in quarterly instalments of
$1080.18 over 12 years at an interest rate of 2.5% per quarter, interest debited
quarterly. Calculate:
d In parts ac above the 3 loan accounts are the same except for the term. As the
term of the loan increases how does this affect:
i the repayment?
ii the amount still owing after the 5th repayment?
iii the amount of interest paid during the 5 repayments?
In questions 1113 find:
iii the total interest paid during this time.
11 A loan of $50 000 is to be paid by monthly instalments of:
a $525.13 over 15 years at 0.8% per month (interest debited monthly)
b $487.13 over 18 years at 0.8% per month (interest debited monthly)
c $440.33 over 25 years at 0.8% per month (debited monthly)
d $639.22 over 15 years at 1.1% per month (debited monthly)
e $607.15 over 18 years at 1.1% per month (debited monthly)
f $571.46 over 25 years at 1.1% per month (debited monthly).
12 A loan of $60 000 is to be repaid by monthly instalments of:
a $429.86 over 20 years at 0.5% per month (interest debited monthly)
b $472.41 over 20 years at 0.6% per month (interest debited monthly)
c $516.90 over 20 years at 0.7% per month (interest debited monthly)
d $563.20 over 20 years at 0.8% per month (interest debited monthly)
e $635.73 over 20 years at 0.95% per month (interest debited monthly)
f $685.92 over 20 years at 1.05% per month (interest debited monthly).
13 A loan of $60 000 is to be repaid by quarterly instalments of:
a $1292.90 over 20 years at 1.5% per quarter (debited quarterly)
b $1421.02 over 20 years at 1.8% per quarter (debited quarterly)
c $1554.87 over 20 years at 2.1% per quarter (debited quarterly)
d $1694.06 over 20 years at 2.4% per quarter (debited quarterly)
e $1911.89 over 20 years at 2.85% per quarter (debited quarterly)
f $2062.53 over 20 years at 3.15% per quarter (debited quarterly).

14 The loan accounts outlined in question 12 are the same except for the interest rate.
The same applies to question 13. In these cases, as the interest rate increases, what
happens to:
a the repayment?
b the amount still owing after the 4th repayment?
c the amount of interest paid during the 4 repayments?
WORKED 15 a Madakos loan of $50 000 has interest charged at a rate of 9% p.a. (debited
Example
3
monthly) and it is repaid over 10 years by monthly instalments of $633.38. For the
3rd repayment find:
i the principal repaid ii the interest paid.
b After 8 years the amount still owing is $13 863.96. Assuming the same conditions
apply as in part a, for the 97th repayment find:
16 a Pinas loan of $60 000 has interest charged at a rate of 8% p.a. (debited monthly)
and it is repaid over 20 years by monthly instalments of $501.86. For the
3rd repayment find:
apply as in part a, for the 217th repayment find:
17 a Katharines loan of $80 000 has interest charged at a rate of 12% p.a. (debited
quarterly) and it is repaid over 20 years by quarterly instalments of $2648.94. For
the 3rd repayment find:
apply as in part a, for the 73rd repayment find:
18 a Tony and Marietta take out a loan
of $90 000 as part payment on
their new house. The loan is to be
repaid over 25 years at 13% p.a.
(debited fortnightly) and with fort-
nightly instalments of $468.31. For
the 3rd repayment find:
b If the principal is reduced to
$80 268.49 after 10 years (use the
same conditions as in part a), for
the 261st repayment find:
c If the principal is reduced to
$44 676.17 after 20 years (use the
same conditions as in part a), for
the 521st repayment find:
19 multiple choice
If the quarterly instalments for a $15 000 loan, which is to be repaid over 4 years, are
$1148.98 and interest is debited quarterly at 2.5% per quarter, the decrease in the
principal in the first year would be (to the nearest dollar):
A $11 786 B $3214 C $1382 D $774 E $375
20 multiple choice
Johns $23 000 loan has interest charged at 9% p.a., debited fortnightly, and is repaid
over 8 years by fortnightly instalments of $155.30. For the 3rd repayment the amount
of interest paid is:
A $13.98 B $75.95 C $76.21 D $79.09 E $155.30
21 multiple choice
The term of a loan is 120 monthly instalments. Which of the following repayments
will reduce the principal by the greatest amount?
A 10th B 20th C 30th D 100th E 110th
22 multiple choice
Which of the following loan terms would have the greatest amount of interest debited?
(Assume other conditions are the same.)
A 20 years B 22 years C 14 years D 12 years E 10 years
23 Voulas loan of $55 000 starts with quarterly repayments of $1396.64 and is due to
run for 15 years at 6% p.a., interest debited quarterly. However, after 1 year the
interest rate rises to 7% p.a. and consequently the quarterly repayments rise to
$1482.84 to maintain the 15 year term.
a What amount is still owing after 2 years?
b What amount would have still been owing after 2 years if the rate had remained at
6% p.a.?
c What would be the difference in interest charged between the two scenarios?
24 Cynthia takes out a loan of $85 000 to set up an outdoors adventure business. She starts
with quarterly repayments of $2300.42 and the loan is due to run for 20 years at 9%
p.a., interest debited quarterly. However, after 1 year the interest rate falls to 8% p.a.
and consequently the quarterly repayments fall to $2143.88 to maintain the 20 year term.
a What amount is still owing after 2 years?
b What amount would have still been owing after 2 years if the rate had remained at
9% p.a.?
c What would be
the difference in
interest charged
between the two
scenarios?

The annuities formula
In the previous section step-by-step calculations were made to determine the amount
still owing. The process was restrictive in that the previous balance was needed to
calculate subsequent balances. A method is needed to enable calculation of the amount
still owing at any point in time during the term of the loan.
An annuities formula can be used to enable such calculations to be made. An annuity
is a regular payment. When a consumer borrows money from a financial institution that
person contracts to make regular payments or annuities in order to repay the sum
borrowed over time.
Let us now use, in general terms, the process adopted in the previous section to
develop this annuities formula.
Let P = amount borrowed (principal)
R = growth factor for amount borrowed
r
= 1 + --------- (r = interest rate period)
100
n = number of repayments
Q = amount of regular repayments made per period
An = amount owing after n repayments
Assuming interest is debited to the account before a repayment is credited, then:
A0 = P
A1 = A0R Q = PR Q
A2 = A1R Q = (PR Q)R Q
= PR2 QR Q = PR2 Q(R + 1)

A3 = A2R Q = (PR2 QR Q)R Q
= PR3 QR2 QR Q = PR3 Q(R2 + R + 1)
A4 = A3R Q = (PR3 QR2 QR Q)R Q
= PR4 QR3 QR2 QR Q = PR4 Q(R3 + R2 + R + 1)
In general,
An = PRn Q(Rn 1 + . . . + R2 + R + 1)
The term in the bracket (Rn 1 + . . . + R2 + R + 1) is the sum of n terms of a geometric
progression (GP) (refer to chapter 6: Arithmetic and geometric sequences).
First term, a = 1
Common ratio, r = R
Now, the sum of n terms of a geometric progression is:
a(rn 1)
Sn = ----------------------
r1
Hence, in this case,
1( Rn 1 )
1 + R + R2 + . . . + Rn 1 = -----------------------
R1
Q( Rn 1 )
An = PR n ------------------------
R1
So, in general, the amount owing in a loan account for n repayments is given by the
annuities formula:
Number of repayments made

Amount still owing Repayment value
Interest rate per period
Q( Rn 1 ) r
A = PR n ------------------------ where R = 1 + ---------
R1 100
Amount borrowed Growth factor
WORKED Example 4
A loan of $50 000 is taken out over 20 years at a rate of 6% p.a. (interest debited monthly)
and is to be repaid with monthly instalments of $358.22. Find the amount still owing after
10 years.
THINK WRITE
1 State the loan amount, P, and regular P = 50 000

repayment, Q. Q = 358.22
2 Find the number of payments, n, n = 10 12

interest rate per month, r, and = 120
growth factor, R. 6
r = ------
12
= 0.5
r
R = 1 + ---------
100
0.5
= 1 + ---------
100
= 1.005
Q( Rn 1 )
3 Substitute into the annuities formula. A = PRn ------------------------
R1
358.22 ( 1.005 120 1 )
= 50 000(1.005)120 ---------------------------------------------------
1.005 1
4 Evaluate A. A = $32 264.98
5 Write a statement. The amount still owing after 10 years will be

$32 264.98.
Note: If R is a recurring decimal, place the value in the calculator memory and bracket R if
needed when evaluating A.

Note that, even though 10 years is the halfway point of the term of the loan, more
than half of the original $50 000 is still owing.
When we consider borrowing money we usually know how much is needed and we
choose a term which requires a repayment that we can afford.
To find the repayment value, Q, the annuities formula is used where A is zero, that is,
the loan is fully repaid. Q is then isolated.
Q( Rn 1 )
A = PRn ------------------------
R1
Q( Rn 1 )
When A = 0, 0 = PRn ------------------------
R1
Q( Rn 1 )
------------------------ = PRn
R1
PR n ( R 1 )
Q = ---------------------------
-
Rn 1
WORKED Example 5
Rob wants to borrow $2800 for a new hi-fi system from a building society at 7.5% p.a.,
interest adjusted monthly.
a What would be Robs monthly repayment if the loan is fully repaid in 1 1--2- years?
b What would be the total interest charged?
THINK WRITE
a 1 (a) Find P, n, r and R. a P = 2800

(b) Store in your calculator memory the n = 18
growth factor, R. 7.5
r = -------
12
= 0.625
0.625
R = 1 + -------------
100
= 1.00625
PR n ( R 1 )
2 Substitute into the annuities formula to Q = ---------------------------
-
find the regular monthly repayment, Q. Rn 1
2800 ( 1.00625 ) 18 ( 1.00625 1 )
= --------------------------------------------------------------------------
-
1.00625 18 1
3 Evaluate Q. Q = $164.95
4 Write a statement. The monthly regular payment is $164.93
over 18 months.
b 1 Total interest = Total repayments b Total interest = 164.95 18 2800
Amount borrowed = 2969.10 2800
= $169.10
2 Write a statement. The total interest on a $2800 loan over
18 months is $169.10.
Alternative method using a graphics calculator

The Texas Instrument graphics calculators TI83 and TI86 have a FINANCE
function: TVM Solver. This allows quick analysis of reducing balance loans using the
annuities formula.
To use the TVM Solver, press 2nd [FINANCE] and select 1:TVM Solver.
From this screen we define the following:
where N = the number of repayments
I% = the nominal interest rate (must
enter as % per annum)
PV = the amount borrowed or the
current amount owed (enter as
a positive number as cash is
flowing to you from the bank; a positive cashflow)
PMT = regular payment amount (enter as a negative number as the cash is
flowing from you to the bank; a negative cashflow)
FV = the final amount owing (enter as 0 if the loan is fully repaid or enter
the amount still owing as a negative number)
P/Y = number of payments per year, for example quarterly; P/Y = 4.
C/Y = number of compounds per year, for example monthly adjusted C/Y = 12
(Note: In this chapter, P/Y and C/Y are to be of the same frequency.)
PMT:END BEGIN Leave END highlighted as normally interest is charged at
the end of the month.
WORKED Example 6
Josh borrows $12 000 for some home office equipment. He agrees to repay the loan over
4 years with monthly instalments at 7.8% p.a. (adjusted monthly). Find:
a the instalment value
b the principal repaid and interest paid during the:
i 10th repayment ii 40th repayment.
THINK WRITE
a 1 (a) Find P, n, r and R. a P = 12 000

n = 4 12
= 48
7.8
r = -------
12
= 0.65
0.65
R = 1 + ----------
100
(b) Store R in your calculator memory. = 1.0065
PR n ( R 1 )
2 Substitute into the annuities formula to Q = ---------------------------
-
find the monthly repayment, Q. Rn 1
12 000 ( 1.0065 ) 48 ( 1.0065 1 )
= -------------------------------------------------------------------------
-
1.0065 48 1
3 Evaluate Q. Q = $291.83
THINK WRITE/DISPLAY
If using the TVM Solver on

the TI83, enter the
appropriate values. Identify A,
P, r and R.
N = 48
r (= I%) = 7.8
P(= PV) = 1200
Q(= PMT) = unknown
A(= FV) = 0
P/Y = 12
C/Y = 12
Place cursor on PMT =.
Press ALPHA [SOLVE] to solve.
4 Write a statement. The monthly repayment over a 4-year

period is $291.83.
b i 1 Find the amount owing after b i

9 months.
(a) State P, n, R. P = 12 000, n = 9, R = 1.0065
Q( Rn 1 )
(b) Substitute into the annuities A = PRn ------------------------
R1
formula.
291.83 ( 1.0065 9 1 )
= 12 000(1.0065)9 -------------------------------------------------
1.0065 1
2 Evaluate A9. A9 = $10 024.73

the TI83, enter the
appropriate values. Place
cursor on FV =. Press ALPHA
[SOLVE] to solve.
3 Find the amount owing after 10 A10 = 12 000(1.0065)10

months. Substitute (change n = 9 to 291.83 ( 1.0065 10 1 )
A10 = ---------------------------------------------------
n = 10) and evaluate. 1.0065 1
A10 = $9798.06
Continued over page

THINK WRITE/DISPLAY

the TI83, enter the
appropriate values. Place
cursor on FV =. Press ALPHA
[SOLVE] to solve.
4 Principal repaid = A9 A10 Principal repaid = 10 024.73 9798.06

= $226.67
5 Interest paid = Total repayments Total interest = $291.83 226.67
6 Write a statement. In the 10th repayment $226.67 principal is
repaid and $65.16 interest is paid.
b ii 1 Repeat steps 16 for A39 and A40. b ii A39 = 12 000(1.0065)39
291.83 ( 1.0065 39 1 )
A39 = ---------------------------------------------------
1.0065 1
A39 = $2543.10
A40 = $2267.80
Principal repaid = A39 A40
= 2543.10 2267.80
= $275.30
Interest = 291.83 275.30
= $16.53
2 Write a statement. In the 40th repayment $275.30
principal is repaid and $16.53 interest
is paid.
remember
remember
1. To calculate the amount in a loan account use the formula:
Q( Rn 1 )
A = PR n ------------------------
R1
2. To calculate the repayment value use the formula:
PR n ( R 1 )
Q = ---------------------------
-
Rn 1
where P = amount borrowed (principal) ($)
R = growth factor for amount borrowed
r
= 1 + --------- (r = interest rate per period)
100
n = number of repayments
Q = amount of regular repayments made per period ($)
An = amount owing after n repayments ($)
15B The annuities formula
1 Use the annuities formula to find A, given: reads d

L Sp he hca
a P = $50 000, n = 100, Q = $550, r = 1
et
Mat
EXCE
b P = $50 000, n = 200, Q = $550, r = 1
c P = $60 000, n = 100, Q = $650, r = 1 Reducing balance loans
d P = $60 000, n = 200, Q = $650, r = 1
e P = $20 000, n = 50, Q = $300, r = 0.5
f P = $40 000, n = 100, Q = $400, r = 0.8
g P = $80 000, n = 150, Q = $700, r = 0.75
h P = $100 000, n = 200, Q = $720, r = 0.65.
WORKED 2 A loan of $65 000 is taken out over 20 years at a rate of 12% p.a. (interest debited
Example
4
monthly) and is to be repaid with monthly instalments of $715.71. Find the amount
still owing after:
a 5 years b 10 years c 15 years d 18 years.
3 Matthew takes out a reducing balance loan of $75 000 over 25 years at a rate of 10%
p.a. (interest debited quarterly) and is to be repaid with quarterly instalments of
$2048.39. Find the amount still owing after:
4 A loan of $52 000 is taken out over 15 years at a rate of 13% p.a. (interest debited
fortnightly) and is to be repaid with fortnightly instalments of $303.37. Find the
amount still owing after:
5 Link borrows $48 000, taken out over 10 years and to be repaid in monthly instal-
ments. (Note: As the interest rate increases, the monthly repayment increases if the
loan period is to remain the same.) Find the amount still owing after 5 years if interest
is debited monthly at a rate of:
a 6% p.a. and the repayment is $532.90
b 9% p.a. and the repayment is $608.04
c 12% p.a. and the repayment is $688.66
d 15% p.a. and the repayment is $774.41.
6 A loan of $20 000 has interest charged monthly at a rate of 9% p.a. What will be the
amount still owing after 3 years if the term of the loan is:
a 4 years and monthly repayments of $497.70 are made?
b 5 years and monthly repayments of $415.17 are made?
c 6 years and monthly repayments of $360.51 are made?
d 7 years and monthly repayments of $321.78 are made?
e 8 years and monthly repayments of $293 are made?
7 Pablos loan of 30 000 has interest charged quarterly at a rate of 10% p.a. What will
be the amount still owing after 5 years if the term of the loan is:
a 6 years and quarterly repayments of $1677.38 are made?
b 7 years and quarterly repayments of $1502.64 are made?
c 8 years and quarterly repayments of $1373.05 are made?
d 9 years and quarterly repayments of $1273.55 are made?
e 10 years and quarterly repayments of $1195.09 are made?
8 multiple choice
Peter wants to borrow $8000 for a second-hand car and his bank offers him a personal
loan for that amount at an interest rate of 13% p.a., interest debited fortnightly, with
fortnightly repayments of $124.11 over 3 years. After 2 years he wants to calculate
how much he still owes by using the annuities formula.
a Which of the following equations should he use?
124.11 ( 1.005 78 1 )
A A = 8000 ( 1.005 ) 78 ------------------------------------------------
1.005 1
124.11 ( 1.05 52 1 )
B A = 8000 ( 1.05 ) 52 ---------------------------------------------
1.05 1
124.11 ( 1.005 52 1 )
C A = 8000 ( 1.005 ) 52 ------------------------------------------------
1.005 1
124.11 ( 1.05 78 1 )
D A = 8000 ( 1.05 ) 78 ---------------------------------------------
1.05 1
124.11 ( 0.005 52 1 )
E A = 8000 ( 0.005 ) 52 ------------------------------------------------
0.005 1
b The actual amount that Peter still owes after 2 years is closest to:
A $2500 B $3000 C $3500 D $4000 E $4500

9 multiple choice
Gwendoline has borrowed $14 000 for renovations to her house. The terms of this
loan are monthly instalments of $297.46 over 5 years with interest debited monthly at
10% p.a. of the outstanding balance.
a The amount still owing after 3 years is given by:
297.46 ( 1.008 333 3 36 1 )
A A = 14 000 ( 1.008 333 3 ) 36 ---------------------------------------------------------------
1.008 333 3 1
297.46 ( 1.008 333 3 60 1 )
B A = 14 000 ( 1.008 333 3 ) 60 ---------------------------------------------------------------
1.008 333 3 1
297.46 ( 1.1 60 1 )
C A = 14 000 ( 1.1 ) 60 ------------------------------------------
1.1 1
297.46 ( 0.083 333 36 1 )
D A = 14 000 ( 1.083 333 ) 36 -----------------------------------------------------------
0.083 333 1
297.46 ( 1.083 333 36 1 )
E A = 14 000 ( 0.083 333 ) 36 -----------------------------------------------------------
1.083 333 1
b The actual amount that Gwendoline still owes after 3 years is closest to:
A $5000 B $5500 C $6000 D $6500 E $7000
10 multiple choice
Ben took out a loan for $20 000 to buy a new car. The contract required that he repay
the loan over 5 years with monthly instalments of $421.02. After 2 1--2- years Ben used
the annuities formula to obtain the expression below to calculate the amount he still
owed.
421.02 ( 1.008 30 1 )
A = 20 000 ( 1.008 ) 30 ------------------------------------------------
0.008
The interest rate per annum charged by the bank for this reducing balance loan is:
A 1.008% B 0.008% C 0.096% D 9.6% E 12.096%
WORKED 11 Use the annuities formula to find the repayment value, Q, given:
Example
5
a P = $5000, r = 1, n = 12
b P = $3000, r = 2, n = 8
c P = $1500, r = 3, n = 4
d P = $9000, r = 0.5, n = 30
e P = $14 000, r = 0.8, n = 24
f P = $120 000, r = 0.6, n = 240
g P = $95 000, r = 2.5, n = 100
h P = $64 000, r = 0.5, n = 520.
WORKED 12 Sergios reducing balance loan of $12 000 has interest charged at 9% p.a., interest
Example
adjusted monthly. Find:
5
i the monthly repayment
ii the total interest charged
if the loan is fully repaid in:
a 2 years b 3 years c 4 years d 4 1--2- years e 5 1--2- years.
13 Conchitas loan of $85 000 is charged interest at 7% p.a., interest adjusted monthly.
Find:
i the monthly repayment
if the loan is fully repaid in:
a 10 years b 12 years c 15 years d 18 years e 20 years f 25 years.
14 In each of questions 12 and 13 the only quantity which varied was the term of the
loan. As the term of the loan increases, what happens to:
a the repayment value?
b the amount of interest paid?
15 Declan borrows $32 000 and contracts to repay the loan over 10 years. Find:
i the repayment value ii the total interest charged
if the loan is repaid quarterly at:
a 6% p.a., interest charged quarterly
b 8% p.a., interest charged quarterly
c 10% p.a., interest charged quarterly
d 10.5% p.a., interest charged quarterly
e 11% p.a., interest debited quarterly
f 12.5% p.a., interest debited quarterly.
16 Felice borrows $46 500 and contracts to repay the loan over 15 years. Find:
i the repayment value
if the loan is repaid fortnightly, with interest adjusted fortnightly at:
a 6% p.a. b 8% p.a. c 10% p.a.
d 10.5% p.a. e 11% p.a. f 12.5% p.a.
17 A loan of $94 000 is to be repaid over 20 years. Find:
i the repayment value ii the total interest charged
if the loan is repaid:
a weekly at 13% p.a., interest adjusted weekly
b fortnightly at 13% p.a., interest adjusted fortnightly
c monthly at 13% p.a., interest adjusted monthly
d quarterly at 13% p.a., interest adjusted quarterly
e weekly at 6.5% p.a., interest adjusted weekly
f fortnightly at 6.5% p.a., interest adjusted fortnightly.
18 Based on your answers to question 17 ad when the frequency of repayments (and
interest charged) decreases, how does this affect:
a the repayment value?
b the total interest paid?
19 multiple choice
Which of the following would decrease the total amount of interest paid during the
life of a loan? (There may be more than one answer.)
A A fall in the interest rate
B A decrease in the frequency of repayment (repay less often)
C A greater amount borrowed
D A decrease in the term of the loan
E A rise in the interest rate
20 multiple choice
Which of the equations below would enable the quarterly repayment value, Q, to be
determined for a loan of $16 000 to be repaid over 5 years at 7.8% p.a., interest
debited quarterly?
Q ( 0.0195 20 1 )
A 0 = 16 000 ( 0.0195 ) 20 ---------------------------------------
0.0195 1

Q ( 1.078 5 1 )
B 0 = 16 000 ( 1.078 ) 5 ----------------------------------
1.078 1
Q ( 1.0195 5 1 )
C 0 = 16 000 ( 1.0195 ) 5 -------------------------------------
1.0195 1
Q ( 1.0195 20 1 )
D 0 = 16 000 ( 1.0195 ) 20 ---------------------------------------
1.0195 1
Q ( 1.078 20 1 )
E 0 = 16 000 ( 1.078 ) 20 ------------------------------------
1.078 1
WORKED 21 Grace has borrowed $18 000 to buy a car. She agrees to repay the reducing balance
Example
6
loan over 5 years with monthly instalments at 8.1% p.a. (adjusted monthly). Find:
b the principal repaid and the interest paid during:
i the 10th repayment ii the 50th repayment.
22 Tim has borrowed $45 000 to buy a house. He agrees to repay the reducing balance
loan over 15 years with monthly instalments at 9.3% p.a. (adjusted monthly). Find:
i the 20th repayment ii the 150th repayment.
23 Gail has agreed to repay a $74 000 reducing balance loan with fortnightly instalments
over 20 years at 9.75% p.a. (adjusted fortnightly). Find:
i the 1st repayment ii the 500th repayment.
24 Terry is repaying a $52 000 loan over 15 years with quarterly instalments at 6.25% p.a.
(adjusted quarterly). Currently, 5 1--2- years have passed since the loan was drawn down
(money borrowed). How much does Terry still owe?
25 Stefanie borrowed $18 000 exactly 3 1--2- years ago. The reducing balance loan was for a
term of 5 years and was to be repaid in monthly instalments of 10.2% p.a. (adjusted
monthly). How much does Stefanie still owe?
Questions 26 and 27 refer to the following information. The interest charged to a housing
loan account during a financial year (1 July30 June) is a tax deduction against income if
the house is rented to tenants.
26 Bruce borrowed $80 000 to finance the purchase of a rental property and he is repaying
the loan over 20 years by quarterly instalments at 8.6% p.a. (adjusted quarterly). By
1 July last year he had made 24 repayments. Find:
a the amount Bruce owed after 24 repayments
b the amount he owes by 30 June this year
c the total interest that Bruce can claim as a tax deduction for this particular
financial year.
27 Lyn is repaying a $55 000 housing loan over 15 years by monthly instalments at
9.9% p.a. (adjusted monthly). By 1 July last year she had made 42 repayments. If Lyn
rented the house to tenants, find:
a the amount she owed after 42 repayments ET 15.1
SHE
b the amount she owes by 30 June this year
Work
c the total interest that Lyn can claim as a tax deduction for this particular financial
year.
Number of repayments
The situation often arises in reducing balance loans where a potential borrower knows
how much needs to be borrowed as well as the amount that can be repaid each month.
The person then wants to know how long the loan needs to be to accommodate these
conditions, that is, to determine the number of repayments, n, required.
As with compound interest in the previous chapter, n is calculated by trial and error.
The annuities formula is used to calculate the amount owing, A, after various times
until a value of n gives a figure value for A close to zero (loan repaid). The values of n
chosen will be high if the repayment value, Q, is low, the principal is high, the interest
rate is high or if the repayments are made often.
As a guide, remember that the principal is repaid more quickly towards the latter
stages of the loan. This will influence what n values are chosen.
WORKED Example 7
A reducing balance loan of $60 000 is to be repaid with monthly instalments of $483.36 at
an interest rate of 7.5% p.a. (debited monthly). Find:
a the number of monthly repayments (and, hence, the term of the loan in more mean-
ingful units) needed to repay the loan in full.
b the total interest charged.
THINK WRITE
a 1 Identify P, Q, r and R. a P = 60 000, Q = 483.36,

7.5
r = -------
12
= 0.625,
R = 1.006 25
2 The loan amount, P, is high, so expect Let n = 200.

the frequency of repayments, n, to be a A200 = 60 000(1.006 25)200
high value. Substitute into the formula
483.36 ( 1.006 25 200 1 )
and evaluate A. A200 = -----------------------------------------------------------
1.006 25 1
A200 = $17 058.38
3 After n = 200 much of the loan is A220 = 60 000(1.006 25)220

repaid. So n required is close to 200. 483.36 ( 1.006 25 220 1 )
Try n = 220 and evaluate A. A220 = -----------------------------------------------------------
1.006 25 1
A220 = $9058.86
4 From A200 and A220, trial other values A240 = 60 000(1.006 25)240
until A approaches $0, such as n = 240. 483.36 ( 1.006 25 240 1 )
A240 = -----------------------------------------------------------
1.006 25 1
A240 = $2.26
THINK WRITE/DISPLAY
Use 2nd [ENTRY] to recall

the last calculation. Move the
cursor to the relevant place
and type over to make the
change (from 220 to 240)
while using the trial and error
process.
5 A negative A value indicates the loan is n = 240 months

repaid. Since the A240 value ($2.26) is 240
much less than one repayment Time = --------- years
12
($483.36), 240 repayments are needed. = 20 years
Change to appropriate time units.
If using the TVM Solver on the
TI83, enter the appropriate
values.
Identify A, P, Q, r
N = unknown
r (= I%) = 7.5
P (= PV) = 60000
Q (= PMT) = 483.36
A (= FV) = 0
P/Y = 12 (monthly)
C/Y = 12 (monthly)
Place cursor on N =.
6 Write a statement. Term of loan needed is 20 years.
b 1 Total interest = Total repayments b Interest = 483.36 240 60 000

Principal repaid = $56 006.40
2 Write a statement. Total interest charged on the loan is
$56 006.40.
Sometimes we may want to find the time for only part of the loan term. The procedure
that is followed is the same as in worked example 7; however, A is zero only if we are
finding the time to repay the loan in full. Otherwise we should consider the amount still
owing at that time.
WORKED Example 8
Some time ago Petra borrowed $14 000 to buy a car. Interest on this reducing balance loan
has been charged at 9.2% p.a. (adjusted monthly) and she has been paying $446.50 each
month to service the loan. Currently she still owes $9753.92. How long ago did Petra
borrow the money?
Using trial and error
THINK WRITE
1 State A, P, Q, r and R. A = 9753.92, P = 14 000, Q = 446.50

Store R in your calculator memory. 9.2
r = -------
12
= 0.76667
R = 1.007 6667
2 In the trial and error method we require A20 = 14 000(1.007 6667)20
A to be close to $9753.92. P is not high
446.50 ( 1.007 6667 20 1 )
but repayment frequency is quite high. ---------------------------------------------------------------
1.007 6667 1
Try n = 20 and evaluate A. A20 = $6699.13
3 n = 20 is too high (A20 < 9753.92). A10 = $10 488.90
Try n = 10.
4 A10 is just too low. Try n = 11. A11 = $10 122.81
5 Remember Q = $446.50. So one more A12 = $9753.92
payment is needed to reduce A to n = 12 months
$9753.92. Let n = 12. Time = 1 year
6 Write a statement. Petra borrowed the money a year ago.
Using TVM Solver on the TI83

the TI83/-86, press 2nd
[FINANCE] and select
1:TVM Solver
1 Identify A, P, Q, r and R.
N = unknown
r (= I%) = 9.2
P (= PV) = 14 000
Q (= PMT) = 446.50
A (= FV) = 9753.92
P/Y = 12 (monthly payments)
C/Y = 12 (monthly compounds)
Place cursor on N=
2 Write a statement. Petra has had the loan for the past 12 months.

In the situations investigated so far we have only considered finding the time from the
start of the loan to a later date (including repayment in full). In fact it doesnt matter
what period of the loan is considered; we can still use the annuities formula as we have
already done. In using the formula to do this we can use A and Ps such that they have
the following meanings:
A = amount owing at the end of the time period
Ps = amount owing at the start of the time period
WORKED Example 9
A loan of $11 000 is being repaid by monthly instalments of $362.74 with interest being
charged at 11.5% p.a. (debited monthly). Currently, the amount owing is $7744.05. How
much longer will it take to:
a reduce the amount outstanding to $2105.11?
b repay the loan in full?
THINK WRITE/DISPLAY
a 1 (a) Let Ps be the amount still owing at a A = 2105.11, Ps = 7744.05, Q = 362.74

the start of the time period. State A, 11.5
Ps, r and R. r = ----------
12
= 0.958 333
(b) Store R in your calculator memory. R = 1.009 583 3
Q( Rn 1 )
2 Try n = 20. A needs to be close to A = PsRn ------------------------
R1
$2105.11.
= 7744.05(1.009 583 3)20
362.74 ( 1.009 583 3 20 1 )
A= -----------------------------------------------------------------
1.009 583 3 1
A20 = $1416.69
3 n = 20 is too high since A20 ($1416.69) A15 = $3113.42
is less than $2105.11. Try n = 15.
4 n = 15 is too low. A18 = $2105.11
(A15 > 2105.11) Try n = 18. n = 18
the TI83, press 2nd
[FINANCE], select 1:TVM
Solver and enter the data in
the table as shown. Place
cursor on N=. Press ALPHA
[SOLVE] to solve.
5 Write a statement. It will take 1 1--2- more years to reduce the

amount owing to $2105.11
Continued over page

THINK WRITE/DISPLAY
Q( Rn 1 )
b 1 To repay in full we require A to be close b A = PsRn ------------------------
R1
to zero. Let Ps be the amount owing at
the start of the time period. Try n = 25. = 7744.05(1.009 583 3)25
362.74 ( 1.009 583 3 25 1 )
A= -----------------------------------------------------------------
1.009 583 3 1
A25 = $362.91
2 A25 is about one repayment too much A24 = $0.17
(A25 < 0). Let n = 24. n = 24 months.
the TI83, enter the
appropriate values.
3 Write a statement. It will take another 2 years to repay the loan

in full.
remember
remember
1. Trial and error is used to find the number of repayments required to repay a
loan in full. Evaluate A by using the annuities formula for different n values
until A equals zero.
2. To find the time required to repay part of a loan, apply the trial and error
method to the annuities formula, but in this situation:
Ps = amount owing at the start of the time period.
3. TVM Solver on the TI83 can quickly analyse
many variations on reducing balance loans,
where:
PV = the amount borrowed or the current
amount owed (enter as a positive
number as cash is flowing to you from
the bank; positive cashflow)
flowing from you to the bank; negative cashflow).
P/Y = number of payments per year, for example quarterly; P/Y = 4.
C/Y = number of compounds per year, for example monthly adjusted
C/Y = 12
PMT: END BEGIN Leave END highlighted as normally interest is charged
at the end of the month.
15C Number of repayments
WORKED 1 Using the annuities formula find the number of monthly repayments, n, reads d
Example L Sp he hca
and hence the term of the loan in more meaningful units, needed to
et
Mat
EXCE
7
repay in full a loan with interest (debited monthly) charged at the rate of:
a 9% p.a., if P = $70 000 and Q = $629.81 Reducing balance loans
b 9% p.a., if P = $30 000 and Q = $380.03
c 9% p.a., if P = $15 000 and Q = $311.38
d 12% p.a., if P = $10 000 and Q = $470.73
e 12% p.a., if P = $20 000 and Q = $444.89
f 12% p.a., if P = $45 000 and Q = $540.08.
2 Using the annuities formula find the number of quarterly repayments, n, and hence the
term of the loan in more meaningful units, needed to repay in full a loan with interest
(debited quarterly) charged at the rate of:
a 6% p.a., if P = $3000 and Q = $383.49
b 6% p.a., if P = $14 000 and Q = $912.65
c 6% p.a., if P = $26 000 and Q = $881.26
d 14% p.a., if P = $8000 and Q = $827.87
e 14% p.a., if P = $19 000 and Q = $1183.18
f 14% p.a., if P = $80 000 and Q = $2990.79.
3 Using the annuities formula find the number of fortnightly repayments, n, and hence
the term of the loan in more meaningful units, needed to repay in full a loan with
interest (debited fortnightly) charged at the rate of:
a 6.5% p.a., if P = $4000 and Q = $82.13
b 6.5% p.a., if P = $16 000 and Q = $226.03
c 6.5% p.a., if P = $33 000 and Q = $172.76
d 13% p.a., if P = $54 000 and Q = $315.04
e 13% p.a., if P = $78 000 and Q = $421.51
f 13% p.a., if P = $92 000 and Q = $497.17.
4 Jim has a reducing balance loan of $3500 that he is using for a holiday and has agreed
to repay it by monthly instalments of $206.35 at a rate of 7.6% p.a. (interest debited
monthly). Find:
a the number of repayments needed to repay in full and this time in years
5 Aimee has borrowed $5500 for some new furniture. She is to repay the reducing
balance loan by quarterly instalments of $861.29 with interest debited quarterly
at 9.4% p.a. Find:
a how long it will take Aimee to repay the loan in full
6 Ben has contracted to repay a reducing balance loan of $9200 by fortnightly instalments
of $156.76. Interest is charged at 8.2% p.a. and adjusted fortnightly. Find:
a how long it will take Ben to repay the loan in full
7 In each case below use the annuities formula to find n and the time in years i for the
given values and ii to fully pay off the loan.
a A = $4297.63, P = $8000, Q = $387.89/month, rate = 15% p.a. (debited monthly)
b A = $2228.90, P = $8000, Q = $387.89/month, rate = 15% p.a. (debited monthly)
c A = $11 668.94, P = $17 000, Q = $517.17/month, rate = 6% p.a. (debited monthly)
d A = $3049.55, P = $17 000, Q = $517.17/month, rate = 6% p.a. (debited monthly)
e A = $19 409.23, P = $32 000, Q = $1208.59/quarter, rate = 8.75% p.a. (debited
quarterly)
f A = $8782.41, P = $32 000, Q = $1208.59/quarter, rate = 8.75% p.a. (debited
quarterly)
g A = $60 767.60, P = $66 000, Q = $288.73/fortnight, rate = 9.75% p.a. (debited
fortnightly)
h A = $47 899.07, P = $66 000, Q = $288.73/fortnight, rate = 9.75% p.a. (debited
fortnightly)
WORKED 8 Melpomenis loan of $22 000 was taken out some time ago. Interest has been charged
Example
8 at 7.8% p.a. (adjusted monthly) and monthly repayments of $443.98 have serviced the
loan. If the amount still owing is $14 209.88:
a How long ago was the loan taken out?
b What was the term of the loan?
9 Some time ago, Elizabeth took out a loan of $25 000. Interest has been charged at
10.5% p.a. (adjusted monthly) and monthly repayments of $537.35 have serviced the
a how long ago was the loan taken out?
b what was the term of the loan?
10 Tristans loan of $43 000 was taken out some time ago. Interest has been charged at
6.6% p.a. (adjusted quarterly) and quarterly repayments of $1477.03 have serviced the
11 Deans loan of $79 000 was taken out some time ago. Interest has been charged at
12.5% p.a. (adjusted fortnightly) and fortnightly repayments of $448.97 have serviced
the loan. If the amount still owing is $25 011.61:
12 multiple choice
A reducing balance loan of $80 000 is taken out at 7.9% p.a. (adjusted monthly) to
finance the purchase of a house. It is to be repaid with monthly instalments of
$639.84. The loan will be paid in full in:
A 10 years B 15 years C 20 years D 22 years E 25 years

13 multiple choice
Marnie has contracted to repay a $50 000 housing loan over 15 years at 8.7% p.a.
(debited quarterly) by quarterly instalments of $1500. If the customer wants to sell the
house when the amount still owing falls below $30 000, the first occasion when a sale
is possible is after:
A 7 1--2- years B 8 1--4- years C 8 1--2- years D 9 years E 15 years
14 multiple choice
If a $120 000 reducing balance loan is to be repaid with fortnightly instalments of
$543.30 at 10.25% p.a. (adjusted fortnightly), the amount still owing will first fall
below $100 000 when the time elapsed lies between:
A 6 and 7 years B 7 and 8 years C 8 and 9 years
D 9 and 10 years E 10 and 11 years
15 multiple choice
Stuart has decided to borrow $85 000 to set up a business that makes garden
ornaments. He will repay this amount plus interest, charged at 6.6% p.a. (debited
monthly), over 20 years with monthly instalments of $638.75. If he wanted to use the
annuities formula to find out how long it would be before the amount he still owed fell
below $50 000, the equation that he should use is:
638.75 ( 1.0055 240 1 )
A 50 000 = 85 000 ( 1.0055 ) n ------------------------------------------------------
1.0055 1
638.75 ( 1.0055 n 1 )
B 50 000 = 85 000 ( 1.0055 ) n -------------------------------------------------
1.0055 1
638.75 ( 1.0055 n 1 )
C 85 000 = 50 000 ( 1.0055 ) n -------------------------------------------------
1.0055 1
638.75 ( 1.0055 n 1 )
D 0 = 85 000 ( 1.0055 ) n -------------------------------------------------
1.0055 1
638.75 ( 1.0055 n 1 )
E 0 = 50 000 ( 1.0055 ) n -------------------------------------------------
1.0055 1
WORKED 16 Gilas reducing balance loan of $9000 is to be repaid by monthly instalments of

Example
$230.43 with interest charged at 10.5% p.a. (debited monthly).
9
a Currently, the amount owing is $8069.78. How much longer will it take to:
i reduce the amount owing to $3822.20?
ii repay the loan in full?
b Some time later the amount owing has fallen to $3226.06. How much longer will
it take to:
17 Ninos reducing balance loan of $24 000 is to be repaid by quarterly instalments of
$837.45 with interest charged at 6.95% p.a. (debited quarterly).
a Currently, the amount owing is $20 424.59. How much longer will it take to:
i reduce the amount owing to $14 046.98?
b Some time later the amount owing has fallen to $12 849.91. How much longer
will it take to:
18 Grace has borrowed $48 000 to set up
a travel agency and is repaying the
reducing balance loan by monthly
instalments of $401.17 at 5.85% p.a.
(adjusted monthly). At present she still
owes $36 381.40.
a How much longer will it take to
reduce the amount Grace owes to
$15 203.19?
b When will she have repaid the loan
in full?
c What was the term of the loan?
19 Don currently owes $32 113.78 after borrowing $36 000 at 7.25% p.a. (adjusted
fortnightly) and agreeing to repay it by fortnightly instalments of $194.85.
a How much longer will it take to reduce the amount Don owes to $17 569.83?
b When will he have repaid the loan in full?
c What was the term of the loan?

Effects of changing the repayment
Since most loans are taken over a long period of time it is probable that a borrowers
financial situation will change during this time. For instance a borrower may receive a
pay rise and so the take home pay is greater per week or fortnight. The person may then
choose to increase the value of the repayments made to service the loan.
It may also be that a persons financial situation deteriorates, in which case he/she
may request from their institution that the repayment value be decreased.
In this section we will look at the effect that changing the repayment value has on the
term of the loan and the total interest paid.
WORKED Example 10
A reducing balance loan of $16 000 has a term of 5 years. It is to be repaid by monthly
instalments at a rate of 8.4% p.a (debited monthly).
a Find the repayment value.
b What will be the term of the loan if the repayment is increased to $393.62?
c Calculate the total interest paid for repayments of $393.62.
d By how much does the interest figure in c differ from that paid for the original offer?
THINK WRITE
PR n ( R 1 )
a 1 (a) Remember equation for Q. a Q = ---------------------------
-
Rn 1
(b) Find P, n, r and R. P = 16 000, n = 5 12
= 60
8.4
r = -------
12
= 0.7
(c) Store R in your calculator memory. R = 1.007
16 000 ( 1.007 ) 60 ( 1.007 1 )
2 Substitute into the annuities formula to Q = --------------------------------------------------------------------
evaluate Q. 1.007 60 1
Q = $327.49
3 Write a statement. $16 000 to be paid off in 5 years at
8.4% p.a. will need monthly repayments
of $327.49.
b 1 Identify Q. b Q = $393.62
2 Substitute values for n into the formula A50 = 16 000(1.007)50
to get A = 0. Try n = 50. 393.62 ( 1.007 50 1 )
A50 = ------------------------------------------------
1.007 1
= $790.12
3 A50 < 0, so n < 50. Let n = 48. A48 = $0.12
n = 48
Time = 4 years
New term of loan would be 4 years.
Continued over page
THINK WRITE
c Interest paid = Total repayments c When term = 4 years, Q = 393.62.
Principal repaid Interest = 48 393.62 16 000
= $2893.76
d 1 (a) Review the known quantities. d When term = 5 years, Q = 327.49.
Interest = 60 327.49 16 000
= $3649.40
(b) Find the interest difference. Interest difference = 3649.40 2893.76
= $755.64
2 Write a statement. If the repayment is increased from
$327.49 to $393.62 per month then
$755.64 is saved in interest payments.
If a borrower does increase the value of each repayment and if all other variables
remain the same, then the term of the loan is reduced. Conversely, a decrease in the
repayment value increases the term of the loan. There are two stages to the loan, each
with a different repayment.
WORKED Example 11
Brad borrowed $22 000 for a gift shop and
agreed to repay the loan over 10 years with
quarterly instalments of $783.22 and interest
debited at 7.4% p.a. However, after 6 years
of the loan Brad decided to increase the
repayment value to $879.59. Find:
a the actual term of the loan
b the total interest paid
c the interest savings achieved by
increasing the repayment value.
THINK WRITE
a 1 To find A after 6 years: a
(a) First identify P, Q, n, r and R. P = 22 000, Q = 783.22
n=64
= 24
7.4
r = -------
4
= 1.85
(b) Store R in your calculator memory. R = 1.0185
(c) Find A24. A24 = 22 000(1.0185)24
783.22 ( 1.0185 24 1 )
---------------------------------------------------
1.0185 1
= $10 761.83
THINK WRITE/DISPLAY
If using the TVM Solver, enter

the appropriate values.
2 Now find the n value to reduce P = 10 761.83, Q = 879.59

$10 761.83 to zero, that is, the A12 = 10 761.83(1.0185) 12
remaining part of the loan. Identify P
879.59 ( 1.0185 12 1 )
and Q. If Q remained unchanged, n = ---------------------------------------------------
1.0185 1
16 (4 years). So n < 16 since Q has
increased. Try n = 12. = $1711.56
3 A12 2 repayments. Let n = 14. A14 = $0.02

n = 14 quarters
Time = 3 1--2- years
If using the TVM Solver, enter

the appropriate values.
Place cursor on N =.
Press ALPHA [SOLVE]
ENTER to solve.
4 Find the total term of the loan. Total term = 6 + 3 1--2-
= 9 1--2- years
b 1 For the two-repayment scenario: b For the two-repayment scenario:

Interest paid = Total repayments Interest = 783.22 24 + 879.59 14
Principal repaid 22 000
In this case, in two stages. = $9111.54
2 For the same repayment scenario: For the same repayment scenario:
Q = 783.22 for 10 years. Interest = 783.22 40 22 000
= $9328.80
c 1 Find the difference between the c Interest difference = 9328.80 9111.54
two scenarios. = $217.26
2 Write a statement. Brad will save $217.26 interest by
increasing his repayment value.
By increasing his quarterly repayment by almost $100 Brad managed to reduce the
overall cost of his loan by $217.26 and paid it off 6 months sooner. This saving may not
seem significant, but the figure would increase the longer the original term and the
greater the amount borrowed.
WORKED Example 12
Greta is repaying a reducing balance loan of $50 000 over 15 years with monthly
instalments of $499.72 at a rate of 8.75% p.a. (adjusted monthly). She has already made
3 years worth of payments but would like to repay the loan in full in the next 10 years.
Find the amount that she still owes and the monthly repayment value needed to repay the
loan in full in the next 10 years.
THINK WRITE
1 Find the amount outstanding after

3 years, A36.
(a) What are P, Q, r and R? P = 50 000, Q = 499.72,

8.75
r = ----------
12
= 0.729 17
(b) Store R in your calculator R = 1.007 291 7

memory.
2 Substitute into the annuities A36 = 50 000(1.0072917)36

formula and evaluate A36. 499.72 ( 1.0072917 36 1 )
------------------------------------------------------------
1.0072917 1
A36 = $44 459.76
3 Find Q to repay $44 459.76 in

10 years (n = 120).
(a) What is P? The current P = $44 459.76

amount owing is $44 459.76.
PR n ( R 1 )
(b) Substitute to evaluate Q. Q = ---------------------------
-
Rn 1
44 459.76 ( 1.0072917 ) 120 ( 1.0072917 1 )
= -----------------------------------------------------------------------------------------------------
120
-
1.0072917 1
Q = $557.20
4 Write a statement. It will take Greta monthly instalments of $557.20 to

repay $44 459.76 in the next 10 years.
remember
remember
Increasing the size of the repayment decreases the amount of interest paid and
decreases the term of the loan.

Effects of changing
15D the repayment
WORKED 1 A reducing balance loan of $25 000 has interest charged at 10.2% p.a. reads
L Sp he hca
d
Example
et
Mat
EXCE
10b (interest debited monthly). Find the term of the loan if the monthly
repayments are:
a $533.64 b $465.67 c $382 Reducing balance loans
d $271.72 e $301.67 f $333.15
2 Freds reducing balance loan of $38 000 has interest charged at 9.8% p.a. (interest
debited quarterly). Find the term of the loan if the quarterly repayments are:
a $1087.90 b $1215.46 c $1501.06
d $1726.99 e $1300.35 f $1128.54
WORKED 3 Megan wanted to borrow $50 000 and was offered a reducing balance loan over
Example
10 20 years at 6.9% p.a. (adjusted monthly) with monthly instalments.
a What will be the monthly repayment value?
b What would be the term of the loan if instead the repayment was:
i increased to $577.97? ii increased to $486.33?
iii increased to $399.32? iv decreased to $368.64?
v decreased to $361.85? vi decreased to $352.90?
c In each case in b above, calculate the total interest paid.
d For each case above, calculate the interest difference from the original offer.
4 Amelia wanted to borrow $42 000 and was offered a reducing balance loan over
15 years at 9.75% p.a. (adjusted fortnightly) with fortnightly instalments.
a What will be the fortnightly repayment value?
b What would be the term of the loan if instead the repayment was:
i increased to $291.17? ii increased to $253.17?
iii increased to $215.40? iv decreased to $199.56?
v decreased to $190.56? vi decreased to $182.29?
c In each case in b above, calculate the total interest paid.
d For each case above, calculate the interest difference from the original offer.
WORKED 5 Steve borrows $30 000 and agrees to repay the reducing balance loan over 10 years
Example
11a with quarterly instalments of $1039.80 with interest debited quarterly at 6.8% p.a.
However, after 2 years of the loan Steve decides to increase the repayments to
$1152.20. Find the actual term of the loan.
6 Lucy borrows $30 000 and agrees to repay the reducing balance loan over 10 years
with quarterly instalments of $1039.80 with interest debited quarterly at 6.8% p.a.
However, after 2 years of the loan Lucy was able to decrease the repayments to
7 Mark borrows $20 000 and agrees to repay the reducing balance loan over 10 years
with monthly instalments of $240.55 and with interest debited monthly at 7.8% p.a.
However, after 3 years of the loan Mark decides to increase the repayments to
8 Maria borrows $20 000 and agrees to repay the reducing balance loan over 10 years
with monthly instalments of $240.55 and with interest debited monthly at 7.8% p.a.
However, after 3 years of the loan Megan was able to decrease the repayments to
9 Clyde borrows $10 000 and agrees to repay the reducing balance loan over 5 years
with fortnightly instalments of $90.19 and with interest debited fortnightly at
6.5% p.a. However, after 2 years of the loan Clyde decides to increase the repay-
ments to $131.09. Find the actual term of the loan.
10 Wendy borrows $10 000 and agrees to repay the reducing balance loan over 5 years
with fortnightly instalments of $90.19 and with interest debited fortnightly at
6.5% p.a. However, after 2 years of the loan Wendy was able to decrease the repay-
ments to $69.79. Find the actual term of the loan.
WORKED 11 The situations below show how reducing balance loans are repaid in 2 stages, each
Example
11b stage having a different repayment value. Calculate the total interest charged in each
case.
a Amount borrowed is $30 000, repaid with quarterly repayments of $1039.80 for
2 years followed by quarterly repayments of $1152.20 for 7 years.
b Amount borrowed is $30 000, repaid with quarterly repayments of $1039.80 for
2 years followed by quarterly repayments of $952.90 for 9 years.
c Amount borrowed is $20 000, repaid with monthly repayments of $240.55 for
3 years followed by monthly repayments of $313.45 for 5 years.
d Amount borrowed is $20 000, repaid with monthly repayments of $240.55 for
3 years followed by monthly repayments of $200.60 for 9 years.
e Amount borrowed is $10 000, repaid with fortnightly repayments of $90.19 for
2 years followed by fortnightly repayments of $131.09 for 2 years.
f Amount borrowed is $10 000, repaid with fortnightly repayments of $90.19 for
2 years followed by fortnightly repayments of $69.79 for 4 years.
WORKED 12 Jack borrowed $20 000 and agreed to repay the loan over 10 years with quarterly instal-
Example
11 ments of $750.48 with interest debited quarterly at 8.6% p.a. However, after 5 years
the customer decided to increase the repayment value. Find:
i the actual term of the loan
ii the total interest paid
iii the interest saving achieved by increasing the repayment if the quarterly repay-
ment was increased to:
a $901.48 b $1154.34 c $1661.89
d $3188.22 e $2170.36 f $1357.17
13 Georgia borrowed $40 000 and agreed to repay the loan over 15 years with quarterly
instalments of $1235.80 and with interest debited quarterly at 9.2% p.a. However, after
8 years the customer decided to increase the repayment value. Find:
iii the interest saving achieved by increasing the repayment if the quarterly repay-
a $1383.81 b $1592.75 c $1908.31
d $2437.15 e $2134.64 f $1732.76

14 Chamroun borrowed $60 000 and agreed to repay the loan over 20 years with monthly
instalments of $539.84 with interest debited monthly at 9% p.a. However, after
10 years the customer decided to increase the repayment value. Find:
iii the interest saving achieved by increasing the repayment if the monthly repay-
a $577.13 b $624.31 c $685.63
d $768.15 e $723.63 f $652.85
15 Based on the results obtained in questions 1214, if all other conditions remain the
same, when the repayment value increases what effect will this have on:
a the term of the loan?
b the amount of interest paid?
16 multiple choice
Robin borrowed $25 000 and she agreed to repay this reducing balance loan over
10 years with quarterly instalments of $975.06, interest being charged at 9.5% p.a.
After 4 years Robin increased her repayment value to $1167.17. The term of her loan
will be closest to:
A 6 years B 7 years C 8 years
D 9 years E 10 years
17 multiple choice
A loan of $25 000 is repaid in 2 stages over 8 3--4- years with quarterly instalments. For
the first 4 years the repayment was $975.06 and was increased to $1167.17 for the
remaining time. The total amount of interest charged would be closest to:
A $9000 B $10 000 C $11 000
D $12 000 E $13 000
18 multiple choice
Taya borrowed $80 000 and agreed to repay the loan over 25 years with monthly
instalments of $738.27 with interest debited monthly at 10.2% p.a. However, after
10 years the customer decided to increase the repayment value to $802.95. The
interest saving achieved by increasing the repayment would be closest to:
A $32 000 B $32 500 C $11 500
D $12 000 E $12 500
WORKED 19 Anne is repaying a $26 000 loan over 8 years with monthly instalments of $383.61 at
Example
12
9.2% p.a., debited monthly on the outstanding balance. She has made 2 years worth
of repayments but would like to repay the loan in full in the next 5 years. Find:
a the amount that she still owes
b the monthly repayment value needed to repay in full.
20 Arnie is repaying a $42 000 loan over 14 years with fortnightly instalments of
$194.73 at 8.25% p.a., debited fortnightly on the outstanding balance. He has made
3 years worth of repayments but would like to repay the loan in full in the next
9 years. Find:
a the amount that he still owes
b the fortnightly repayment value needed to repay in full.
21 multiple choice
Don is repaying a $35 000 loan for his new boat over 10 years with quarterly instal-
ments of $1262.68 at 7.7% p.a., debited quarterly on the outstanding balance. He has
made 8 repayments but would like to repay the loan in full in the next 6 years.
a The amount that he still owes is:
A $29 958.61 B $28 573.45 C $24 898.56
D $24 086.47 E $17 246.69
b The quarterly repayment value needed to repay in full would be closest to:
A $1350 B $1570 C $2190
D $3140 E $5330
22 Alex has borrowed $60 000 over 20 years and is repaying the loan with quarterly instal-
ments of $1470.56 at 7.65% p.a. (adjusted quarterly). After 4 years the borrower
decides to increase the repayment. Find:
a the amount that is still owed
b the new repayment value if the loan is to be paid in full over the next:
i 15 years ii 14 years iii 13 years
iv 12 years v 13 1--2- years vi 14 1--2- years
23 Zia has borrowed $28 000 over 10 years and is repaying the loan with monthly instal-
ments of $377.82 at 10.5% p.a. (adjusted monthly). After 1 1--2- years the borrower
decides to increase the repayment. Find:
a the amount that is still owed
b the new repayment value if the loan is to be paid in full over the next:
i 5 1--2- years ii 6 years iii 6 1--2- years
1
iv 7 years v 7 --2- years vi 8 years
24 Ian has borrowed $75 000 for a house and agrees to repay the reducing balance loan
over 25 years with quarterly instalments of $1629.78 and interest is charged quarterly
at 7.25% p.a. However, after 2 years he increases the repayment value to $1691.73
and maintains that for the next 10 years, at which time he increases the repayment
again. This time the value is $2114.03.
a What is the actual term of the loan?
b What is the total interest paid?
25 Lauren has borrowed $34 000 for a car and agrees to repay the reducing balance loan
over 15 years with monthly instalments of $360.18 and interest is charged monthly at
9.75% p.a. However, after 2 years she increases the repayment value to $393.47 and
maintains that for the next 6 years at which time she increases the repayment again.
This time the value is $470.19.
a What is the actual term of the loan?
b What is the total interest paid?
26 Two years ago Dmitri borrowed $7000 and has been repaying $175.69 each month.
Interest has been debited monthly at 9.45% p.a. and this rate has remained unchanged.
Now his employer has given Dmitri a wage rise as well as a Christmas bonus of
$1000 and so he has decided to increase his repayment. However, he is unsure which
of the options below would be best for him. By considering the total amount of
SHE
ET 15.2 interest paid and the term of the loan, advise Dmitri on which option he should take.
Work
a Pay $1000 off the amount owed and increase the repayment to $200.67 per month.
b Increase the repayment to $228.97 per month.

Frequency of repayments
In this section we investigate the effect on the actual term of the loan and on the total
amount of interest charged of making more frequent repayments. While the value of the
repayment will change, the actual outlay will not. For example, a $3000 quarterly (each
3 months) repayment will be compared to a $1000 monthly repayment. That is, the
same amount is repaid during the same period of time in each case. So the only variable
will be how often repayments are made. In all cases in this section interest will be
charged just before a repayment is made, although this may not be the case in practice.
Let us return to loan schedules to consider short loans and to see the effect of making
more frequent repayments.
WORKED Example 13
A loan of $2000 is repaid over 6 months at 9% p.a. on the balance outstanding. Using
loan schedules in table form, compare the total amount of interest paid if the
repayments were:
a $1033.88 each quarter, interest debited quarterly
b $344.63 each month, interest debited monthly.
Note: The quarterly repayment is three times the value of the monthly repayment. Also
note that, realistically, a borrower is not likely to repay a $2000 loan by two quarterly
repayments of $1033.88 because it is, in itself, a large amount of money. However, the
situation has been used simply to compare quarterly repayments to monthly repayments
via loan schedules.
THINK WRITE
a 1 Draw a loan schedule for the two a

repayments. Balance Total Balance
at start owing after
2 Calculate the interest on the balance at of Interest after Repay- repay-
quarter charged interest ment ment
the start of the quarter at r%. (Review Quarter ($) ($) ($) ($) ($)
exercise 15A, Loan schedules.)
The nominal rate is 9% p.a. while 1 2000 0.0225 2045 1033.88 1011.12
2000 = 45
r= 9
--- %
4
= 2.25% per quarter 2 1011.12 0.0225 1033.87 1033.87 0.00
1011.12
2.25% = 2.25
----------
100
= 22.75
= 0.0225
3 Complete the table to leave a zero
balance after two repayments
(6 months).
4 Evaluate the total of the interest Total interest paid = $67.75
charged column.
Continued over page
THINK WRITE
b 1 Draw a loan schedule to include b

6 monthly repayments.
Total Balance
Balance owing after
2 Calculate the interest on the balance at at start
of month
Interest
charged
after
interest
Repay-
ment
repay-
ment
the start of the month at r%. Month ($) ($) ($) ($) ($)
Remember that r in this case is

different to that for quarterly 1 2000 0.0075 2015 344.63 1670.37
repayments. 2000 = 15
r= 9
------ %
12
2 1670.37 0.0075 1682.90 344.63 1338.27
r = 0.75% 1670.37
= 12.53
0.75% = 0.75
----------
100
r = 0.0075
3 1338.27 0.0075 1348.31 344.63 1003.68
1338.27
3 Complete the table to leave a zero = 10.04
balance after 6 repayments.
4 1003.68 0.0075 1011.21 344.63 666.58
1003.68
= 7.53
5 666.58 0.0075 671.58 344.63 326.95

666.58
= 5.00
6 326.95 0.0075 329.40 329.40 0

326.95
= 2.45
4 Evaluate the total of the interest Total interest paid = $52.55

charged column.
5 Compare the total interest paid between Difference in interest charged

the two cases. = $67.75 $52.55
= $15.20
Therefore a saving of $15.20 is made by
repaying monthly rather than quarterly.
In both situations in worked example 13 the term of the loan was half a year but, in
the case of monthly repayments, the final instalment was less than all the previous
payments, indicating that a saving has been made. Of course, as the saving becomes
greater the term of the loan becomes shorter.
Let us now consider the effect of changing the repayment frequency on the term of a
loan taken over a much greater length of time.

WORKED Example 14
Tessa wants to buy a dress shop. She borrows $15 000 at 8.5% p.a. (debited prior to each
repayment) of the reducing balance. She can afford quarterly repayments of $928.45 and
this will pay the loan in full in exactly 5 years.
One-third of the quarterly repayment gives the equivalent monthly repayment of
$309.48. The equivalent fortnightly repayment is $142.84. Find:
i the term of the loan
ii the amount still owing prior to the last payment if Tessa made repayments:
a monthly b fortnightly.
THINK WRITE/DISPLAY
a i 1 Enter the appropriate values using a i For monthly repayments:
the TVM Solver on the TI-83. P = 15 000, Q = 309.48,
Remember that P/Y = 12 and I = 8.5% p.a., n = ?
C/Y = 12 for monthly repayments.
2 The value obtained for n is 59.58 n = 60 months

which means that a 60th repayment Term of loan = 5 years
is required. That is, n = 60.
ii 1 To find the amount still owing prior ii
to the last payment, find A (FV on
screen) when n = 59. Enter the
appropriate values using TVM Solver
on the TI-83.
2 State the amount still owing. The amount still owing prior to the last
payment is $179.27.
b i 1 Enter the appropriate values using b i For fortnightly repayments:
the TVM Solver on the TI-83. P = 15 000, Q = 142.84,
Remember that P/Y = 26 and I = 8.5% p.a., n = ?
C/Y = 26 for fortnightly repayments.
2 The value obtained for n is 128.85 n = 129 fortnights

which means that a 129th repayment Term of loan = 4 years 25 fortnights
is required. That is, n = 129.
Continued over page
THINK WRITE/DISPLAY
ii 1 To find the amount still owing prior ii
to the last payment, find A (or FV)
when n = 128. Enter the appropriate
values using TVM Solver on the
TI-83.
2 State the amount still owing. The amount still owing prior to the last
payment is $120.64.
It can be seen from the example that while the same outlay is maintained there may
be a slight decrease in the term of a loan when repayments are made more often. Let us
now find what the actual monetary saving is for such a loan. In this situation we should
consider the final (partial) payment separately because the amount of interest that it
attracts is less than a complete repayment, Q.
The calculation of the total interest paid is now calculated as usual, by:
Total interest = Total repayments Principal repaid
WORKED Example 15
In worked example 14, Tessas $15 000 loan at 8.5% p.a. gave the following three
scenarios:
i quarterly repayments of $928.45 for 5 years
ii monthly repayments of $309.48 for 59 months with $179.27 still outstanding
iii fortnightly repayments of $142.84 for 128 fortnights with $120.64 still owing.
Compare the total interest paid by Tessa if she repaid her loan:
a quarterly b monthly c fortnightly.
THINK WRITE
a For quarterly repayments a For quarterly repayments:

Total interest = Total repayments total interest = 928.45 20 15 000
Principal repaid = $3569
b 1 For monthly repayments b For monthly repayments:
Find r and A59. (Refer to worked 8.5
example 14.) r = ------- % = 0.7083%
12
A59 = $179.27
2 Calculate the interest on A59 to find the Interest on A59 = 0.7083% of $179.27
final repayment. = 0.007 083 179.27
= $1.27
Final repayment = 179.27 + 1.27
= $180.54
THINK WRITE
3 Calculate the total interest paid. Total interest

= 309.48 59 + 180.54 15 000
= $3439.86
c 1 Fortnightly repayments c For fortnightly repayments:
Find r and A128. (Refer to worked 8.5
r = ------- % = 0.3269%
example 14.) 26
A128 = 120.64
2 Calculate the interest on A128 to find the Interest on A128 = 0.3269% of $120.64
final repayment. = 0.003 269 120.64
= $0.39
= $121.03
3 Calculate the total interest paid. Total interest

= 142.84 128 + 121.03 15 000
= $3404.55
4 Calculate the interest saving with Monthly interest saving

monthly repayments over quarterly = 3569 3439.86
repayments. = $129.14
5 Calculate the interest saving with Fortnightly interest saving

fortnightly repayments over quarterly = 3569 3404.55
repayments. = $164.45
6 Write a comparison statement. Tessa saves $164.45 if she repays

fortnightly rather than quarterly and
$129.14 if she repays monthly rather
than quarterly.
The slight time savings calculated in worked example 14 when repayments were
made more often have now been transformed to money savings. The saving increases
as the frequency of repayment increases. This is because the amount outstanding is
reduced more often and so the amount of interest added is slightly less. A saving of
$164 over 5 years, out of more than $18 000 repaid, might not seem much but the
saving increases as the term of the loan increases and as the amount borrowed
increases.
remember
remember
Increasing the frequency of the repayments decreases the total interest paid and
may decrease the term of the loan.
15E Frequency of repayments
WORKED 1 A loan of $5000 is repaid over half a year at 9% p.a. Using loan schedules in table
Example
13
form, compare the total amount of interest paid if the repayments were:
reads d b $861.56 each month, interest debited monthly.
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2 Barbaras loan of $3000 is repaid over half a year at 9.6% p.a. Using loan schedules
in table form, compare the total amount of interest paid if the repayments were:
Reducing balance loans
3 Glens loan of $8000 is repaid over half a year at 8.7% p.a. Using loan schedules in
table form, compare the total amount of interest paid if the repayments were:
4 Scotts loan of $10 000 is repaid over a year at 10.2% p.a. Using loan schedules in
table form, compare the total amount of interest paid if the repayments were:
a $5385.67 each 6 months, interest debited 6-monthly
b $2692.84 each quarter, interest debited quarterly.
5 Tonys loan of $1000 is repaid over a 6-week period at 6.5% p.a. Using loan schedules
in table form, compare the total amount of interest paid if the repayments were:
a $335 each fortnight, interest debited fortnightly
b $167.50 each week, interest debited weekly.
WORKED 6 A reducing balance loan of $30 000 has interest charged at 9% p.a. (debited before
Example
14
each repayment) and can be repaid by quarterly instalments of $1145.32 over exactly
10 years. The equivalent monthly repayment is $381.77 and the equivalent fortnightly
one is $176.20. Find the term of the loan and the amount still owing before the final
repayment if repayments are made:
a monthly
b fortnightly.
7 Phul has a reducing balance loan of $40 000, The loan has interest charged at 8% p.a.
(debited before each repayment) and can be repaid by quarterly instalments of
$1462.23 over exactly 10 years. The equivalent monthly repayment is $487.41 and the
equivalent fortnightly one is $224.96. Find the term of the loan and the amount still
owing before the final repayment if repayments are made:
a monthly
b fortnightly.
8 Eleni takes out a reducing balance loan of $50 000. Interest is charged at 7% p.a.
(debited before each repayment) and can be repaid by quarterly instalments of
$1352.67 over exactly 15 years. The equivalent monthly repayment is $450.89 and the
equivalent fortnightly one is $208.10. Find the term of the loan and the amount still
owing before the final repayment if repayments are made:
a monthly
b fortnightly.

9 A reducing balance loan of $80 000 has interest charged at 6.5% p.a. (debited before
each repayment) and can be repaid by half-yearly instalments of $3602.24 over
20 years. The equivalent quarterly repayment is $1801.12, the monthly repayment is
$600.37 and the equivalent fortnightly one is $277.10. Find the term of the loan and
the amount still owing before the final repayment if repayments are made:
10 Jemma has borrowed $120 000 to refit her boat. Her reducing balance loan of
$120 000 has interest charged at 7.5% p.a. (debited before each repayment) and can
be repaid by half-yearly instalments of $5348.91 over 25 years. The equivalent quar-
terly repayment is $2674.45, the monthly repayment is $891.48 and the equivalent
fortnightly one is $411.45. Find the term of the loan and the amount still owing before
the final repayment if repayments are made:
WORKED 11 A loan of $25 000 attracts interest at 8.25% p.a. on the outstanding balance and the
Example
15
following four scenarios are available:
i half-yearly repayments of $3101.48 for 5 years
ii quarterly repayments of $1550.74 for 4 3--4- years with $1217.93 still owing
iii monthly repayments of $516.91 for 58 months with $512.33 still owing
iv fortnightly repayments of $238.58 for 127 fortnights with $140.27 still owing.
Compare the total interest paid if the loan is repaid:
a half yearly b quarterly c monthly d fortnightly
12 Katie takes out a loan of $45 000 which attracts interest at 9.8% p.a. on the out-
standing balance The following four scenarios are available to her:
13 Philippa borrows $150 000. The loan attracts interest at 10.25% p.a. on the out-
standing balance. The following four scenarios are available to her:
14 Given the information provided and the calculations that you made in questions 610,
compare the total interest paid for the different repayment frequencies outlined in:
a question 6 b question 7 c question 8 d question 9 e question 10
15 Joan wants to borrow $55 000 and her bank is charging an interest rate of 6.9% p.a.
(debited before each repayment). She can afford $1478.67 each quarter to repay the
loan in full over 15 years. How much would Joan save in interest if she chose instead
to repay the loan with the equivalent monthly repayment of $492.89?
16 Ashan wants to borrow $95 000 for his interior decorating business. His bank is
charging an interest rate of 7.8% p.a. (debited before each repayment). He can afford
$782.83 each month to repay the loan in full over 20 years. How much would Ashan
save in interest if he chose instead to repay the loan with the equivalent fortnightly
repayment of $361.31?
17 Josie wants to borrow $72 000 and her bank is charging an interest rate of 8.2% p.a.
(debited before each repayment). She can afford $1838.62 each quarter to repay the
loan in full over 20 years. How much would Josie save in interest if she chose instead
to repay the loan with the equivalent fortnightly repayment of $282.86?
18 multiple choice
If Wally opts to repay a $35 000 loan, which attracts interest at 8.75% p.a. on the out-
standing balance, by fortnightly repayments of $203.37 rather than the equivalent
quarterly repayment of $1321.90, then,
a the term of the loan will be:
A 10 years B 9 years C 9 years 22 fortnights
D 9 years 24 fortnights E 9 years 25 fortnights
b the amount he will save will lie between:
A $350 and $400 B $400 and $450 C $450 and $500
D $500 and $550 E $550 and $600
19 multiple choice
Betty has borrowed $65 000 to finance her plant and flower nursery. If Betty chooses
to repay the loan, which attracts interest at 9.3% p.a. on the outstanding balance, by
fortnightly repayments of $309.66 rather than the equivalent monthly repayment of
$670.92, then,
a the term of the loan will be:
A 14 years 11 months B 14 years 25 fortnights C 15 years
D 15 years 1 fortnight E 15 years 1 month
b the amount she will save is closest to:
A $240 B $260 C $270 D $300 E $320

Changing the rate
Of all the variables associated with reducing balance loans, the one that is most likely
to change during the term of a loan is the interest rate. These rates rarely stay the same
for the life of a loan; for most loans the rate will change several times.
The Reserve Bank of Australia is the main monetary authority of the Federal
Government and, as such, is the overall guiding influence on monetary factors in the
Australian economy. Consequently, it indirectly controls the lending interest rates of
financial institutions here.
There is usually some variation in rates between institutions; for example, a lower
rate may be designed to attract more customers. Within each institution there are rate
variations as well for different types of reducing balance loans. Banks advertise their
loan rates to attract customers.
Banking Group
All rates in % p.a.
Home Loan Index Equity Manager Rate
Variable 6.70 Variable 7.20

Applies from 15.09.1997 Applies from 08.12.1997
Home Equity Loan Index
Fixed Home Loan Rate
Variable 7.70
Loans advanced from 17.06.1998 Applies from 15.09.1997
12 months 2 years 3 years 4 years 5 years
6.50 6.70 6.70 6.95 7.10 Business Mortgage Index
Residential Investment Property Loan Index Rate Applies from 15.09.1997 6.95
Variable 6.90 Fixed Rate Business Mortgage
Applies from 15.09.1997 New loans advanced from 03.08.1998
Fixed Rate Residential Investment Property Loan 12 months 2 years 3 years 4 years 5 years
6.95 7.10 7.50 7.50 7.60
Loans advanced from 17.06.1998
Margin Lending Rate
6.50 6.70 6.70 6.95 7.10 Applies from 01.09.1997 8.05
Personal Loans Fixed Rate Index
Residential Investment Property Loan Interest
in Advance Rate Loans advanced from 27.04.1998
Loans advanced from 17.06.1998 9.50 9.50 9.50 9.50 9.50
Monthly Quarterly Half-Yearly Yearly
1 year 6.45 6.45 6.40 6.30 Reference Interest Rate
2 year 6.65 6.65 6.55 6.45 Applies from 25.05.1998 7.95
3 year 6.65 6.65 6.55 6.45
Retail Index Rate
4 year 6.90 6.85 6.80 6.70
5 year 7.05 7.00 6.95 6.85 Applies from 29.08.1997 8.75
Home Loan Rate Residential Investment Loan

5.99% p.a. Applies from 15.09.1997 6.15% p.a. Applies from 15.09.1998
The advertisement above shows that, for instance, a personal loan (to buy a car, for
example) attracts interest at a rate of 9.5% p.a., yet a home (place of residence) loan
interest rate is 6.7% p.a. The rate for a loan to buy property to be rented (investment
property loan) is different again at 6.9% p.a. All of these rates will vary with time.
In this section we investigate the effect that changing the interest rate has on the term
of the loan and on the total interest paid. It should be remembered that as the interest
rate increases so too will the term (if Q remains constant) of the loan since more
interest needs to be paid.
Firstly, let us simply compare loan situations by varying only the rate.
WORKED Example 16
A reducing balance loan of $18 000 has been taken out over 5 years at 8% p.a. (adjusted
monthly) with monthly repayments of $364.98 made.
a What is the total interest paid?
b If, instead, the rate was 9% p.a. (adjusted monthly) and the repayments remained the
same, what would be:
i the term of the loan?
ii the total amount of interest paid?
THINK WRITE/DISPLAY
a For 8% p.a.: a For 8% p.a.:

Total interest = Total repayments Total interest = 364.98 60 18 000
b i Using the TVM Solver on the TI83, b i For 9% p.a.:
enter the appropriate values. P = 18 000, Q = 364.98, I = 9, A = 0,
Remember that P/Y and C/Y will both n=?
equal 12 for monthly repayments.
N = 61.81 means 61 full repayments
plus a final lesser payment.
n = 62 months
Term = 5 years 2 months
ii 1 Find A61 to calculate the amount still ii
owing.
2 Calculate the interest on A61 to find
the final repayment. r = -----
9
12
- = 0.75%.
Interest on final repayment

= 0.75% of $293.88
= $2.20
= $296.08
3 Total interest = Total repayments Total interest paid
Principal repaid. = 364.98 61 + 296.08 18 000
= $4559.86

In the previous example the rate was increased by only 1% p.a. on $18 000 for only
5 years, yet the amount of interest paid has increased from $3898.80 to $4559.86, a
difference of $661.06. This difference takes on even more significant proportions over
a longer period of time and with a larger principal.
Let us now consider varying the rate during the term of the loan.
WORKED Example 17
Natsuko and Hymie take out a loan for home improvements. The loan of $42 000 was due
to run for 10 years and attract interest at 7% p.a., debited quarterly on the outstanding
balance. Repayments of $1468.83 were made each quarter. After 4 years the rate changed
to 8% p.a. (debited quarterly). The repayment value didnt change.
a Find the amount outstanding when the rate changed.
b Find the actual term of the loan.
c Compare the total interest paid to what it would have been if the rate had remained at
7% p.a. for the 10 years.
THINK WRITE/DISPLAY
a 1 Rate changes after 4 years; that is, a P = 42 000, Q = 1468.83, I = 7%,

n = 16. n = 16, A = ?
State P (PV), Q (PMT), interest (I%)
and n (N).
2 Find A16 (FV) using a graphics The amount outstanding when the rate
calculator. changed is $28 584.36.
b 1 Find n to repay $28 584.36 in full at the b New interest rate of 8%:
new rate.
n = 25 quarters
Time = 6 1--4- years
2 Find the total term of the loan, that is, Term = 4 years + 6 1--4- years
time at 7% plus time at 8%.
= 10 1--4- years
Continued over page

THINK WRITE/DISPLAY
c 1 Find A24 to calculate the amount still c
owing.
A24 = $1291.61
2 Calculate the interest on A24 to find the Interest on final payment
final repayment. = 2% of $1291.61
r = 8--4- = 2% = $25.83
= $1317.44
3 Find the total interest for the rate For the rate change scenario,
change scenario. total interest
The number of repayments is 40 at = 1468.83 40 + 1317.44 42 000
$1468.83 plus 1 at $1317.44. = $18 070.64
4 Calculate the total interest if the rate For the rate at 7% only,
remained at 7%. total interest = 1468.83 40 42 000
= $16 753.20
5 Find the interest difference between the Interest difference = 18 070.64 16 753.20
two scenarios. = $1317.44
6 Write a comparison statement. An extra $1317.44 interest will be paid
due to the interest rate change from
7% p.a. to 8% p.a.
In the situations studied so far the repayment value, Q, remained the same, even though
the rate varied. In practice, this is what happens if the rate decreases and so the term of
the loan decreases. However, when the rate increases, financial institutions will generally
increase the repayment value to maintain the original term of the loan. This was discussed
in the section Changing the repayment. If this is not done the term of the loan can
increase quite dramatically. In fact this may occur to such an extent that the repayments
are insufficient to cover the interest added, so that the amount outstanding increases.
Consider a $44 000 loan over 15 years at 10% p.a. (monthly).
Monthly repayments = $472.83
After 5 years the amount owing = $35 779.02
Suppose the interest rate rises dramatically to 16% p.a.
After a further 10 years under these conditions the amount owing = $37 014.72
That is, the amount owing has increased.
This situation is not beneficial to either the lender or the borrower.
remember
remember
1. Increasing the interest rate:
(a) increases the total interest paid
(b) generally increases the term of the loan.
2. To maintain the term of the loan, increase the regular payment.

reads hcad
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Changing the rate
WORKED 1 A reducing balance loan of $25 000 has been taken out over 5 years at 8% p.a.
Example
16
(adjusted monthly) with monthly repayments of $506.91.
b If, instead, the rate was 9% p.a. (adjusted monthly) with the same repayments
maintained, what would be:
i the term of the loan now?
ii the total interest paid?
c If, instead, the rate was 10% p.a. (adjusted monthly) with the same repayments
2 Kin Yong takes out a reducing balance loan of $60 000 over 15 years at 8% p.a.
(adjusted monthly) with monthly repayments of $573.39.
b If, instead, the rate was 9% p.a. (adjusted monthly) with the same repayments
c If, instead, the rate was 10% p.a. (adjusted monthly) with the same repayments
3 A reducing balance loan of $110 000 has been taken out over 20 years at 6% p.a.
(adjusted quarterly) with quarterly repayments of $2370.3.
b If, instead, the rate was 7% p.a. (adjusted quarterly) with the same repayments
c If, instead, the rate was 5% p.a. (adjusted quarterly) with the same repayments
4 Thao has a reducing balance loan of $36 000. The loan has been taken out over
10 years at 7% p.a. (adjusted fortnightly) with fortnightly repayments of $192.71.
b If, instead, the rate was 8% p.a. (adjusted fortnightly) with the same repayments
c If, instead, the rate was 6% p.a. (adjusted fortnightly) with the same repayments
WORKED 5 A loan of $68 000 is due to run for 15 years and attracts interest at 9% p.a., debited
Example
quarterly on the outstanding balance. Repayments of $2076.40 are made each quarter.
17a, b
After 5 years the interest rate is changed (still adjusted quarterly) but the repayment
value remains the same. Find:
a the amount outstanding after 5 years
b the actual term of the loan if the interest rate is:
iii increased to 10% p.a. iii increased to 9.5% p.a.
iii decreased to 8% p.a. iv decreased to 7.5% p.a.
WORKED 6 Given the scenarios in question 5, in each case compare the total interest paid to the
Example
17c
amount it would have been if the rate had remained at 9% p.a. for the 15 years.
7 Renzo takes out a loan of $44 000 to expand his patisserie business. The loan is due
to run for 15 years and attracts interest at 10% p.a., debited monthly on the outstanding
balance. Repayments of $472.83 are made each month. After 10 years the interest rate
is changed (still adjusted monthly) but the repayment value remains the same. Find:
i increased to 11% p.a. ii increased to 10.5% p.a.
iii decreased to 9% p.a. iv decreased to 8.5% p.a.
8 Given the scenarios in question 7, in each case compare the total interest paid to the
9 Michelles loan of $21 000 is due to run for 10 years and attracts interest at 8% p.a.,
debited fortnightly on the outstanding balance. Repayments of $117.46 are made each
fortnight. After 6 years the interest rate is changed (still adjusted fortnightly) but the
repayment value remains the same. Find:
i increased to 9% p.a. ii increased to 10% p.a.
iii decreased to 7% p.a. iv decreased to 6% p.a.
10 Given the scenarios in question 9, in each case compare the total interest paid to the

WORKED 11 Peters reducing balance loan of $125 000 over 20 years attracts interest at 10.2% p.a.
Example
(adjusted quarterly). Repayments of $3678.16 per quarter are made.
17
During the loan the interest rate is increased to 10.75% p.a. (adjusted quarterly),
but the quarterly repayment remains unchanged. Find:
a the amount outstanding when the rate changes
b the actual term of the loan
c the total interest paid compared to the amount it would have been if the rate had
remained at 10.2% p.a. for the 20 years if the rate changed after:
vi 5 years ii 10 years iii 16 years
iv 6 1--2- years v 13 1--4- years vi 17 3--4- years.
12 Carols reducing balance loan of $78 000 over 20 years attracts interest at 9.5% p.a.
(adjusted monthly). Repayments of $727.06 per month are made.
During the loan the interest rate is decreased to 8.75% p.a. (adjusted monthly), but
the monthly repayment remains unchanged. Find:
c the total interest paid compared to what it would have been if the rate had
1 1
iv 6 --4- years v 11 --2- years vi 13 3--4- years.
13 Andrews reducing balance loan of $52 000 over 15 years attracts interest at
11.75% p.a. (adjusted fortnightly). Repayments of $283.92 per fortnight are made.
During the loan the interest rate is increased to 12.5% p.a. (adjusted fortnightly),
but the fortnightly repayment remains unchanged. Find:
c the total interest paid compared to what it would have been if the rate had
1 1
iv 4 --2- years v 9 --2- years vi 12 1--2- years.
14 multiple choice
Clints $28 000 loan for his house extensions has interest debited every month at
12% p.a. of the outstanding balance. The loan was due to run for 10 years and he was
to make repayments of $401.72 per month to service the loan. After he had made
50 repayments his credit union reduced the interest rate to 10.75% p.a. (adjusted
monthly) for the remainder of the loan.
a If Clint maintained the monthly repayment, the term of the loan would be:
A 9 3--4- years B 10 1--4- years C 10 3--4- years
D 11 years E 12 years
b The total interest paid by Clint would lie between:
A $18 700 and $18 800 B $18 800 and $18 900
C $18 900 and $19 000 D $46 800 and $46 900
E $46 900 and $47 000
15 multiple choice
Svetlanas $56 000 loan for her house has interest debited every month at 7.25% p.a.
of the outstanding balance. The loan was due to run for 20 years and she was to make
repayments of $442.61 per month to service the loan. After she had made
100 repayments her credit union increased the interest rate to 8.75% p.a. (adjusted
monthly) for the remainder of the loan.
a If Svetlana maintained the monthly repayment, the term of the loan would be:
A 18 years B 18 1--2- years C 19 years
D 19 3--4- years E 21 3--4- years

b The total interest paid by Svetlana would be closest to:
A $115 000 B $116 000 C $58 000
D $59 000 E $60 000
16 Maxine borrowed $34 000 at 8.5% p.a. of the amount owing (debited quarterly) and
she was repaying the loan over 10 years with instalments of $1270.30 per quarter.
Three years into the loan, the rate increased to 9.5% p.a. (debited quarterly) but she
maintained the same repayment.
After another 3 years the rate rose again, this time to 10.5% p.a. (debited quarterly)
and still she maintained the same repayment. If the rate didnt change again, find:
b the total amount of interest charged.
17 Erkan borrowed $56 000 at 9.5% p.a. of the amount owing (debited monthly) and he
was repaying the loan over 10 years with instalments of $724.53 per month. Two
years into the loan, the rate decreased to 8.5% p.a. (debited monthly) but he main-
tained the same repayment.
After another 4 years the rate fell again, this time to 7.5% p.a. (debited monthly)
and still he maintained the same repayment. If the rate didnt change again, find:
b the total amount of interest charged.
18 Teena and Tony each borrowed $48 000,
initially, over 15 years but from different
banks. Teena paid monthly instalments of
$418.13 throughout the term of the loan.
For the first 5 years the rate was 6.5% p.a.
(debited monthly); for the next 5 years it
was 7.5% p.a. (debited monthly) and rose
to 8.5% p.a. for the remainder of the loan.
Tony paid monthly instalments of
$431.44 throughout the term of the loan.
For the first 5 years the rate was 7% p.a.
(debited monthly); for the next 5 years it
was 7.5% p.a. (debited monthly) and rose
to 8% p.a. for the remainder of the loan.
a Who was the first to repay their loan
in full?
b Who paid the most interest?

Reducing balance and flat rate loans
As we have seen in previous sections, reducing balance loans interest is calculated on a
daily balance and debited to the loan account at regular intervals just before repayments
are made. Since the balance continually reduces, the amount of interest charged also
reduces.
In contrast, flat rate loans charge a fixed amount of interest as a percentage of the
amount borrowed. This is calculated at the start of a loan and added to the amount
borrowed. Since it is a flat rate based on a fixed amount, the simple interest formula is
used to calculate the interest:
PrT
I = ----------
100
Let us compare the two types of loan under similar circumstances.
WORKED Example 18
A loan of $12 000 is taken out over 5 years at 12% p.a. Find:
a the monthly repayment b the total amount of interest paid
if the money is borrowed on:
i a flat rate loan
ii a reducing balance loan.
THINK WRITE
a i 1 For a flat rate loan: a i For a flat rate loan:

PrT
Find the interest by using I = ---------- . P = 12 000, r = 12, T = 5
100
State P, r and T. 12 000 12 5
I = --------------------------------------
100
I = $7200
2 Find the amount to repay, A. A=P+I
Total repaid = P + I. = 12 000 + 7200
A = $19 200
3 Find the monthly repayment. n = 12 5 = 60
First find n. Repayment = 19 200 60
= $320/month
b i State the total amount of interest paid. b i The total amount of interest paid is
$7200.
a ii For a reducing balance loan: a ii For a reducing balance loan:
(a) Find P, n, r and R P = 12 000, n = 5 12
= 60,
12
r = ------
12
r=1
(b) Store R in your calculator memory. R = 1.01
Continued over page

THINK WRITE/DISPLAY
12 000 ( 1.01 ) 60 ( 1.01 1 )
(c) Find the monthly repayment, Q, Q = -------------------------------------------------------------
-
1.01 60 1
PR n ( R 1 )
using Q = ---------------------------
- Q = $266.93/month
Rn 1
The monthly repayment is $266.93.
the TI83, enter the
appropriate values.
b ii Find the total interest paid (total b ii Total interest paid

repayments principal repaid). = 266.93 60 12 000
= $4015.80
The difference between the two loan types is significant. For the reducing balance
loan, each month $53.07 less is repaid and overall $3184.20 less interest is paid.
The percentage saving over this short loan is:
3184.20
percentage interest saving = ------------------- 100%
7200
= 44.23%
WORKED Example 19
A flat rate loan of $12 000 over 5 years attracts interest at 8% p.a. and monthly repayments
are made to service the loan.
Find:
a the total amount of interest paid
b the monthly repayment
c the term of a reducing balance loan which has the same principal, monthly repayment
and interest rate
d the interest saving achieved by using the reducing balance option.
THINK WRITE
a For a flat rate loan: a For a flat rate loan:
Find I. First state P, r and T. P = 12 000, r = 8, T = 5
12 000 8 5
I = -----------------------------------
100
I = $4800
The total amount of interest paid is $4800.
b 1 Find A. b A=P+I
= 12 000 + 4800
A = $16 800
2 Find the monthly repayment. n = 12 5
n = 60
Repayment = 16 800 60
= $280/month
THINK WRITE/DISPLAY
c For a reducing balance loan, find n to repay c For reducing balance loan:
the loan in full (A = 0). P = 12 000, Q = 280, I = 8%, A = 0, n = ?
P/Y = C/Y = 12
n = 51 months
Term = 4 1--4- years
d 1 Find A50 to calculate the amount still d

owing.
A50 = $177.92
2 Calculate the interest on A50 to find the Interest on final repayment

final repayment. = 0.67% of $177.92
= $1.19
= $179.11
3 Total interest = Total repayments Total interest = 280 50 + 179.11 12 000

4 Calculate the interest saving. Interest saving = 4800 2179.11

= $2620.89
From worked example 19 it can be seen that if the same repayment is made for both
loan types then the term of the reducing balance loan is considerably shorter and, once
again, the interest saving is significant (more than 50%).
Thus far, we have determined that choosing a reducing balance loan rather than a flat
rate loan results in a smaller repayment value or a shorter term and in both cases an
interest saving. Now let us consider what flat rate of interest is equivalent to the rate for
a reducing balance loan.
WORKED Example 20
A reducing balance loan of $25 000 is repaid over 8 years with monthly instalments and
interest charged at 9% p.a. (debited monthly).
Find:
a the repayment value
b the total amount of interest paid
c the equivalent flat rate of interest for a loan in which all other variables are the same.
THINK WRITE
a For a reducing balance loan: a For a reducing balance loan:

Find Q. First find P, n, r and R. P = 25 000, n = 8 12
P = 25 000, n = 96,
Alternatively, substitute appropriate values r = -----
12
9
- = 0.75
into a graphics calculator. R = 1.0075

PR n ( R 1 )
Q = ---------------------------
-
Rn 1
96
25 000 ( 1.0075 ) ( 1.0075 1 )
= -------------------------------------------------------------------------
96
1.0075 1
Q = $366.26
b Total interest = Total repayments b Total interest = 366.26 96 25 000

Principal repaid = $10 160.96
c For a flat rate loan: c For a flat rate loan:

PrT I = interest from reducing balance loan
(a) Find r using I = ---------- . = 10 160.96
100
(b) State I, P and T. P = 25 000, T = 8
25 000 r 8
10 160.96 = -----------------------------------
100
= 2000 r
r = 5.08%
The equivalent flat rate of interest is
5.08%.
Worked example 20 illustrates that an interest rate of 9% p.a. on the balance

outstanding is equivalent to a flat rate of only 5.08% p.a., which again is a major
difference between the two loan types.
Finally, we consider the effect on the amount that can be borrowed at a given rate for
both types of loan.

WORKED Example 21
A loan of $76 000 is repaid over 20 years by quarterly instalments of $2205.98 and interest
is charged quarterly at 10% p.a. of the outstanding balance.
Find:
a the total amount of interest paid
b the amount which can be borrowed on a flat rate loan in which all other variables are
the same as above
c the difference in the amount borrowed between the two types of loan.
THINK WRITE
a 1 For a reducing balance loan: a For a reducing balance loan:

Find the total interest. n = 20 4
= 80
Interest = 2205.98 80 76 000
= $100 478.40
2 Write a statement. The total amount of interest paid is

$100 478.40.
b 1 For a flat rate loan: b For a flat rate loan:

State I, r and T. I is the same as for the I = 100 478.40, r = 10, T = 20
reducing balance loan. PrT
I = ----------
Use the simple interest formula to 100
find P. P 10 20
100 478.40 = ----------------------------
100
=2P
P = $50 239.20
2 Write a statement. For a flat rate loan, $50 239.20 can be

borrowed.
c 1 Find the difference between the c The difference in the amount borrowed
principals for the two loan types. = 76 000 50 239.20
= $25 760.80
2 Write a statement. Under the same conditions a $76 000

reducing balance loan is equivalent to a
$50 239.20 flat rate loan.
The greater financial benefit of the reducing balance loan over the flat rate loan is
again evident, this time in terms of the amount that can be borrowed in the first place.
remember
remember
1. Reducing balance loans are, financially, more beneficial to the borrower than
flat rate loans because:
(a) reducing balance loans are calculated on the amount owing each period,
which continually decreases throughout the life of the loan
(b) flat rate loans are calculated on the amount borrowed.
2. For flat rate loans:
PrT
I = ---------- where I = interest charged
100
P = amount borrowed
r = annual interest rate
T = term of the loan (in years)
3. For reducing balance loans:
Interest charged = Total repaid Amount borrowed
Reducing balance and

15G flat rate loans
WORKED 1 Find the monthly repayment for money borrowed on:
Example
18a
a a flat rate loan b a reducing balance loan,
if the loan was for:
reads
L Sp he hca
d i $15 000 over 5 years at 9% p.a. ii $10 000 over 4 years at 6% p.a.
et
Mat
EXCE
iii $8000 over 4 years at 7% p.a. iv $30 000 over 10 years at 8%p.a.
v $45 000 over 10 years at 8% p.a. vi $50 000 over 15 years at 9% p.a.
WORKED 2 For the loan situations outlined in question 1 calculate the total amount of interest
Example
18b
paid for both types of loan.
3 Find the quarterly repayment for money borrowed on:

a a flat rate loan b a reducing balance loan,
if the loan was for:
iii $8000 over 3 years at 6% p.a. iii $12 000 over 3 years at 8% p.a.
iii $18 000 over 5 years at 7% p.a. iv $28 000 over 8 years at 10% p.a.
iv $44 000 over 10 years at 9% p.a. vi $52 000 over 15 years at 6% p.a.
4 For the loan situations outlined in question 3 calculate the total amount of interest
paid for both types of loan.
5 Minnies loan of $6000 is taken out over 2 years at 11% p.a. Find:
a the monthly repayment b the total amount of interest paid,
if the money was borrowed on:
i a flat rate loan ii a reducing balance loan.
6 Jim takes out a loan of $80 000 over 20 years at 6.8% p.a. Find:
a the monthly repayment b the total amount of interest paid,
if the money was borrowed on:
i a flat rate loan ii a reducing balance loan.

WORKED 7 The flat rate loans outlined below are repaid by monthly instalments. For each loan find:
Example
i the total amount of interest paid
19
ii the monthly repayment
iii the term of a reducing balance loan which has the same principal, monthly repay-
ment and interest rate
iv the interest saving achieved by using the reducing balance option.
a $14 000 borrowed over 5 years at 9% p.a.
b $21 000 borrowed over 5 years at 8% p.a.
c $7000 borrowed over 2 years at 10% p.a.
d $4000 borrowed over 2 years at 6% p.a.
e $36 000 borrowed over 10 years at 6% p.a.
f $90 000 borrowed over 20 years at 12% p.a.
8 The flat rate loans outlined below are repaid by quarterly instalments. For each loan find:
ii the quarterly repayment
iii the term of a reducing balance loan which has the same principal, quarterly repay-
ment and interest rate
iv the interest saving achieved by using the reducing balance option.
a $10 000 borrowed over 2 years at 5% p.a.
b $16 000 borrowed over 4 years at 5% p.a.
c $28 000 borrowed over 5 years at 9% p.a.
d $45 000 borrowed over 10 years at 6% p.a.
e $64 000 borrowed over 15 years at 6% p.a.
f $7000 borrowed over 3 years at 11% p.a.
9 Mike borrows $24 000 over 6 years at a flat rate of 10% p.a. and agrees to repay the
loan with monthly repayments. Find:
a the total interest charged
b Mikes monthly repayment
c the term of the loan if Mike had borrowed the money on a reducing balance loan
which had the same monthly repayment and interest rate
d the interest saving Mike would have achieved if he had used the reducing balance
option.
10 Fiona borrows $19 000 over 5 years at a flat rate of 8% p.a. and agrees to repay the
loan with fortnightly repayments. Find:
a the total interest charged
b Fionas fortnightly repayment
c the term of the loan if Fiona had borrowed the money on a reducing balance loan
which had the same fortnightly repayment and interest rate
d the interest saving Fiona would have achieved if she had used the reducing bal-
ance option.
11 multiple choice
Malcolms loan is repaid by monthly instalments. Assuming all other variables are the
same, the loan that would repay the amount borrowed in the shortest time would be:
A a flat rate loan at 8% p.a. B a flat rate loan at 9% p.a.
C a flat rate loan at 10% p.a. D a reducing balance loan at 8% p.a.
E a reducing balance loan at 9% p.a.
12 multiple choice
If $11 000 is repaid over 5 years with monthly instalments, the loan that would
require the greatest repayment value would be:
A a flat rate loan at 9% p.a. B a flat rate loan at 10% p.a.
C a reducing balance loan at 11% p.a. D a reducing balance loan at 12% p.a.
E a reducing balance loan at 13% p.a.
WORKED 13 Given each of the reducing balance loans (interest debited monthly, monthly
Example
20b, c repayments) below, find the equivalent flat rate of interest for a loan in which all other
variables are the same.
a P = $35 000, term = 10 years, Q = $443.37, rate = 9% p.a.
b P = $7000, term = 2 years, Q = $310.24, rate = 6% p.a.
c P = $15 000, term = 4 years, Q = $345.44, rate = 5% p.a.
d P = $13 000, term = 3 years, Q = $407.37, rate = 8% p.a.
e P = $46 000, term = 10 years, Q = $607.89, rate = 10% p.a.
f P = $59 000, term = 15 years, Q = $825.76, rate = 15% p.a.
WORKED 14 A reducing balance loan is repaid over 10 years with monthly instalments and interest
Example
20 charged at 6.6% p.a. (debited monthly). Find:
i the repayment value
ii the total amount of interest paid
iii the equivalent flat rate of interest for a loan in which all other variables are the
same, if the amount borrowed was:
a $24 000 b $34 000 c $46 000 d $41 000
15 Aaron repaid a loan of $14 000 over 3 years with quarterly instalments and interest
charged at 7.6% p.a. of the reducing balance, debited quarterly. Find:
c the rate of interest for the equivalent flat rate loan in which all other variables were
the same.
16 Rachel repaid a loan of $46 000 over 10 years with fortnightly instalments and
interest charged at 9.3% p.a. of the reducing balance, debited fortnightly. Find:
c the rate of interest for the equivalent flat rate loan in which all other variables were
the same.
WORKED 17 Alice takes out a reducing balance loan for $27 000 and will repay it over 5 years by
Example
21 quarterly instalments of $1899.75 at an interest rate of 14% p.a. (debited quarterly).
Find:
a the total amount of interest to be paid
b the amount which Alice could have borrowed if, instead, she had chosen a flat rate
loan with the same details except the principal
c the difference in the amount borrowed for the two different loan scenarios.

18 A loan is repaid over 20 years by monthly instalments with interest charged monthly
at 9% p.a. of the outstanding balance. Find:
ii the amount which can be borrowed on a flat rate loan in which all other variables
are the same as above,
if the amount borrowed on the reducing balance loan was:
a $65 000 and the repayment is $584.82
b $84 000 and the repayment is $755.77
c $54 000 and the repayment is $485.85
d $105 000 and the repayment is $944.71
e $96 000 and the repayment is $863.74
f $77 000 and the repayment is $692.70
19 multiple choice
Heather takes out a reducing balance loan for $48 000 and will repay it over 10 years
by fortnightly instalments of $330.31 at an interest rate of 13% p.a. (debited fortnightly).
a The total amount of interest paid would be:
A $14 400 B $37 880.60 C $62 400
D $85 880.60 E $110 400
b If, instead, she had chosen a flat rate loan with the same details except the principal,
Heather could have borrowed:
A $11 076.92 B $29 138.92 C $48 000
D $66 062 E $84 923.08
20 multiple choice
Cameron wants to borrow $29 000 and has been provided with different loan scenarios
from various financial institutions. Which one of the loans described below would you
advise Cameron to accept if he wants to repay it in full as cheaply as possible?
A Flat rate loan at 10% p.a over 8 years, repaying monthly
B Flat rate loan at 9% p.a. over 9 years, repaying quarterly
C Flat rate loan at 10.5% p.a. over 7 years, repaying quarterly
D Reducing balance loan at 15% p.a. over 8 years, repaying quarterly
E Reducing balance loan at 14% p.a. over 9 years, repaying monthly.
21 multiple choice
A reducing balance loan of $19 000 is repaid over 4 years with monthly instalments
and interest charged at 7.5% p.a. (debited monthly). The flat rate of interest that would
allow $19 000 to be borrowed over the same time and with the same repayments would
be closest to:
A 7.5% p.a. B 7% p.a. C 4% p.a. D 4.5% p.a. E 5% p.a.
22 multiple choice
Sarahs reducing balance loan of $9000 is repaid over 2 years with fortnightly instal-
ments and interest charged at 8.4% p.a. (debited fortnightly). If a flat rate loan was
repaid over the same time, at the same rate and with the same repayment value, the
amount borrowed would be closest to:
A $4500 B $5000 C $5500 D $8500 E $9000
summary
Loan schedules
In a loan schedule, for each period, the interest charged increases the amount owed
and the repayment made decreases it.
Total repayments = Interest paid + Principal repaid
The annuities formula

The annuities formula for reducing balance loans:
To find the amount still owing, A
Q( Rn 1 )
A = PR n ------------------------ where A = amount owing after n repayments
R1
P = amount borrowed
Q = repayment value
n = number of repayments made
r
R = 1 + --------- , r = interest rate per period
100
To find the repayment value, Q
PR n ( R 1 )
Q = ---------------------------
-
Rn 1
Number of repayments
Trial and error is used to find the number of repayments required to repay a loan in
full. Evaluate A by using the annuities formula for different n values until A equals
zero.
To find the time required to repay part of a loan, apply the trial and error method to
the annuities formula, but in this situation:
Ps = amount owing at the start of the time period.
Effects of changing the repayment

Increasing the size of the repayment decreases the amount of interest paid and
decreases the term of the loan.
Frequency of repayments
Increasing the frequency of the repayment decreases the total interest paid and may
decrease the term of the loan.
Changing the rate

Increasing the interest rate increases the total interest paid and generally increases
the term of the loan.

Using TI83 TVM Solver
where N = the number of repayments

I% = the nominal interest rate (must enter as % per annum)
PV = the amount borrowed or the current amount owed (enter as a positive
number as cash is flowing to you from the bank; a positive cashflow)
flowing from you to the bank; a negative cashflow)
P/Y = number of payments per year, for example quarterly; P/Y = 4
C/Y = number of compounds per year, for example monthly adjusted
C/Y = 12
PMT: END BEGIN Leave END highlighted as normally interest is
charged at the end of the month.
Reducing balance and flat rate loans

Reducing balance loans are of greater financial benefit to a borrower than flat rate
loans since interest for:
(a) reducing balance loans is calculated on the amount outstanding each period,
which continually decreases throughout the life of the loan
(b) flat rate loans is calculated on the amount borrowed and debited once at the
start of the loan.
For flat rate loans
PrT
I = ---------- where I = interest charged
100
P = amount borrowed
r = interest rate per annum
T = term of loan (in years)
For reducing balance loans

Interest charged = Total repaid Amount borrowed
CHAPTER
review
Multiple choice
1 A loan of $100 000 is taken over 25 years with monthly repayments of $1150.00. Interest is
15A charged at 12% p.a. calculated monthly. The amount of the loan repaid after the first
payment is:
A $0 B $150.00 C $750.00 D $850.00 E $900.00
2 The interest charged on a reducing balance loan of $9500 is at the rate of 6.6% p.a. (debited
15A/B monthly). Monthly repayments of $291.60 are made. The amount still owing after 6 months,
to the nearest dollar, is:
A $8044 B $8104 C $8145 D $7750 E $7785
3 A loan of $14 000 is taken out over 4 years at 9.75% p.a. (debited fortnightly) on the
15B outstanding balance. The fortnightly repayment needed to repay the loan in full, to the
nearest dollar, is:
A $135 B $145 C $163 D $170 E $319
4 Rachel repaid a reducing balance loan of $22 000 in 5 years by quarterly repayments and
15B with interest charged quarterly at 8.2% p.a. on the outstanding balance. The total amount of
interest that she paid was closest to:
A $27 000 B $5000 C $5100 D $9000 E $10 000
5 The number of monthly repayments required to repay a $41 000 reducing balance loan in
15C full, if the repayments are $588.39 and interest is debited monthly at 10.5% p.a., will be
closest to:
A 500 B 600 C 90 D 100 E 110
6 A reducing balance loan of $56 000 is repaid by quarterly instalments of $1332.24 over
15D 15 years at an interest rate of 5% p.a. (adjusted quarterly). If, instead, repayments of
$1500/quarter were made throughout the loan (other variables remaining unchanged), the
term of the loan would be:
A 15 years B 14 years C 12 3--4- years D 12 1--2- years E 12 years
Questions 79 refer to the following information. A reducing balance loan of $24 000 attracting
interest at 6.5% p.a. can be repaid over 5 years by either quarterly repayments of $1415.18 or
fortnightly repayments.
7 The fortnightly repayment value is between:
15E A $120 and $140 B $140 and $160 C $160 and $180
D $180 and $200 E $200 and $220
8 The interest saving achieved by repaying fortnightly is closest to:
15E A $4100 B $4300 C $140 D $160 E $180
9 If, instead, a rival institution offered a rate of 5.5% p.a., the quarterly repayment value that
15F would enable the loan to be repaid in full in the same time would be between:
A $1350 and $1375 B $1375 and $1400 C $1400 and $1425
D $1425 and $1450 E $1450 and $1500

Questions 10 and 11 refer to the following information. Jed borrowed $33 000 from his bank to
set up a hobby farm. The loan is at 8% p.a., debited monthly on the balance outstanding and with
repayments of $400.38 made after each interest debit for 10 years. Kylie also borrowed $33 000
over 10 years from her building society at 8% p.a. flat rate of the amount borrowed.
10 The total interest that Jed paid was:
A more than the total interest that Kylie paid by just over $11 350 15G
B less than the total interest that Kylie paid by just over $11 350
C more than the total interest that Kylie paid by just over $15 000
D less than the total interest that Kylie paid by just over $15 000
E more than the amount he borrowed
11 The difference between the repayment values of Jed and Kylie, to the nearest dollar, was
closest to:
15G
A $50 B $55 C $90 D $95 E $150
Questions 1218 refer to the following information. A consumer borrows $18 000 for a new car
at 11% p.a. of the balance outstanding, debited monthly. Monthly repayments of $391.36 are
made to repay the loan in full.
12 The amount still owing after 3 years is closest to:
A $9600 B $9700 C $8300 D $8400 E $8500
15B
13 The term of the loan is:
A 4 years 10 months B 4 years 11 months C 5 years
15C
D 5 years 5 months E 5 years 6 months
14 The total amount of interest paid is closest to:
A $23 400 B $23 500 C $5300 D $5400 E $5500
15C
15 After 3 years the interest rate is reduced to 9% p.a. (adjusted monthly) and the borrower
continues to repay $391.36 per month. The overall term of the loan will now be:
15F
A 4 years 9 months B 4 years 10 months C 4 years 11 months
D 5 years E 6 years
16 Taking into account the change in interest rate the final repayment will lie between:
A $0 and $100 B $100 and $200 C $200 and $300
15F
D $300 and $400 E $400 and $500
17 Taking the interest rate change into account the total amount repaid will be closest to:
A $23 300 B $23 400 C $23 500 D $5200 E $5300 15F
18 Taking into account the interest rate change the total amount of interest paid compared to
the interest paid if the rate remained at 11% p.a. for the entire loan would be:
15F
A $200 less B $250 less C $300 less D $200 more E $250 more
Short answer
1 A home loan of $150 000 is negotiated with monthly repayments of $1600 and interest
calculated monthly at 12% per annum. 15A
a What is the balance of the loan after:
i the 1st payment? ii the 2nd payment? iii the 3rd payment?
b What is the interest charged for the first 3 months of the loan?
Questions 24 refer to the following information. Helmut and Su-Li want to buy a house, so
they borrow $70 000 at 7% p.a. (adjusted monthly) on the balance outstanding and agree to
repay the loan over 20 years with instalments of $542.71 per month.
2 Find the total amount of interest to be paid.
15B
3 Determine the amount still owing after 10 years.
15B
4 If the repayment value is increased to $600 per month after 10 years, calculate the term of
15D the loan.
Questions 510 refer to the following information. Simon borrowed $26 000 for a new car
2 years ago and he has been repaying $1211 per quarter at an interest rate of 10.5% p.a. on the
reducing balance, adjusted quarterly. His bank has now decreased the rate to 9% p.a. (adjusted
quarterly).
15B 5 How much does Simon still owe?

6 Assuming that Simon continues to repay $1211 per quarter, calculate how much longer it
15C will take him to repay his loan in full.
15C 7 What will be the actual term of the loan?
15C 8 Calculate the value of Simons last repayment.
15C 9 Determine the total amount that Simon will repay.

10 What is the total interest that Simon will pay?
15C
11 Frieda is repaying a $55 000 housing loan with interest calculated quarterly at 7% p.a. of the
15D/E amount outstanding. Quarterly repayments of $1487.93 are being made to service the loan.
Twenty repayments have already been made. Frieda decides to change her repayments to
$250 per fortnight. The bank responds by adjusting interest fortnightly.
Calculate the difference that these changes would make to the overall term of the loan.
12 Bert and Ernie have just finished repaying a 5-year, $8000 reducing balance loan, which they
15F required to re-carpet their home. During the first year interest was debited monthly at 8.5%
p.a.; during the next 2 years the rate fell to 8% p.a. but rose to 8.3% p.a. for the remaining
period of the loan. Before signing their contract Bert and Ernie were also given the option of
fixing the interest rate at 8.25% p.a. (debited monthly) for the term of the loan. By considering
the total amount of interest that they paid, determine whether Bert and Ernie made the right
decision in choosing the variable interest rate for the loan rather than the fixed rate.
13 Bill and Ben would like to borrow $45 000 to buy a yacht. They have been given two
15G options from different banks, the details of which are outlined below.
a Bank A: Borrow money at 13% p.a. of the reducing balance, adjusted monthly for
10 years.
b Bank B: Borrow money for 10 years at a flat rate of 9% p.a. of the amount borrowed.
By calculating the overall cost of each loan, determine which bank would provide the best
option for Bill and Ben.
Analysis
Task 1
Rhiannon is investigating a loan of $12 000 to be used to finance the purchase of a car. The
finance market is very competitive and Rhiannon chooses to investigate several options.
Option 1: A flat rate loan at 7.2% p.a. with 36 monthly repayments

Option 2: A personal loan over 3 years at 12.75% p.a. calculated fortnightly on reducing
balance
Option 3: A personal loan over 3 years at 3.0% per quarter on reducing balance
Option 4: Loan consolidated with her current home loan at 7.92% p.a. over a 15-year term
calculated monthly with monthly repayments.
1 a i Complete the interest rate per month for each of the options (to 1 decimal place).
Option 1 2 3 4
Interest rate per
month (%)
ii Calculate the effective interest rate for the option 1 flat rate loan.
b Calculate the interest charged for the option 1 flat rate loan.
c Calculate the monthly repayment for the flat rate loan (to the nearest dollar).
2 a Calculate the fortnightly repayments and total interest charged for the option 2 loan (to the
nearest dollar).
b Calculate the quarterly repayments and total interest charged for the option 3 loan.
3 a Calculate the increase in home loan monthly repayments if the $12 000 is consolidated
with option 4.
b Calculate the total interest charged using option 4 over the 15 years.
Task 2
Anton is planning to visit his homeland in Europe. He budgets to spend about $400 a week for
accommodation, food and sightseeing.
1 a How much is this lump sum, if he plans to stay overseas for 6 months?
b The exchange from Australian dollars to foreign currency will cost on average 2%. Using
your answer a, how much extra does Anton need to cover the cost of exchanging
currencies?
c Anton has already saved $5000 and wants to invest the money in one of the following
accounts
i Bank of Opportunity 9.0% per annum term deposit
ii Bank of Hope 9.0% per annum interest compounded monthly.
Which account would you recommend to Anton? Why?
2 Anton has decided to invest his $5000 in the Bank of Hope, as it guarantees the interest rate
for the term of the loan.
a How long (to the nearest year) will $5000 take to grow to $11 000?
Anton needs to be in Europe within 2 years and knows he has to save more money.
He invests the $5000 and deposits an extra $100 each month for the next 2 years in the
Bank of Opportunity.
b What will be the total value of his investment in 2 years (to the nearest dollar)?
c If Anton wishes to have a total sum of $11 000 after 2 years, how much (to the nearest
dollar) will he have to deposit in his account each month?
3 Anton has a family heirloom waiting for him in Europe. Its present value is $15 000.
An appropriate appreciation model for the heirloom is the reducing balance model.
a What is the expected market value after the first 2 years if the heirloom appreciates at test
ytest
ourself
yourself
CHAPTER
10% per annum?

b What is its expected market value, if it appreciates at 15% p.a. using a straight line model?
15

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Chapter 15 FM Page 711 Monday, November 13, 2000 3:36 PM

712 Further Mathematics

It is possible to have an interest only loan account whereby the repayments

Chapter 15 Reducing balance loans 713

1 800.00 9.60 809.60 165.81 643.79

2 643.79 7.73 651.52 165.81 485.71

3 485.71 5.83 491.54 165.81 325.73

4 325.73 3.91 329.64 165.81 163.83

5 163.83 1.97 165.80 165.80 0.00

714 Further Mathematics

Chapter 15 Reducing balance loans 715

2 Find the balance, A1, at the end of the A1 = A0 R Q

3 (a) Find A2 from A1. A2 = A1 R Q

4 Write a statement. The amount owing after 5 months is

b 1 The decrease in the principal is the b Decrease in principal

2 Write a statement. The principal has decreased by

c 1 Interest charged = Total repayments c Interest charged = 430.83 5 1302.49

2 Write a statement. The interest charged during the first

716 Further Mathematics

Chapter 15 Reducing balance loans 717

4 Principal repaid = A2 A3 Principal repaid = 39 607.84 39 409.31

As mentioned in the introduction, a greater percentage of each repayment made in

In summary, with each of 120 repayments being $528.60;

for the 3rd repayment: interest = $330.07, principal repaid = $198.53

for the 97th repayment: interest = $95.46, principal repaid = $433.14.

3. Balance at the end of the month = balance at start of the month R Q

4. Total repayments = Interest paid + Principal repaid

Nominal interest rate per annum

718 Further Mathematics

15A Loan schedules

WORKED 1 A loan of $1000 is repaid in five monthly instalments of $206.04 at a rate of

3 A loan of $2000 is repaid in four quarterly instalments of $525.25 at a rate of

5 Joshs loan of $3000 is repaid in four half-

6 Rebecca takes out a loan of

Chapter 15 Reducing balance loans 719

720 Further Mathematics

10 a Jaques borrows $30 000 which he repays in quarterly instalments of $1373.05

Chapter 15 Reducing balance loans 721

722 Further Mathematics

Chapter 15 Reducing balance loans 723

= PR2 QR Q = PR2 Q(R + 1)

724 Further Mathematics

Number of repayments made

Amount borrowed Growth factor

1 State the loan amount, P, and regular P = 50 000

2 Find the number of payments, n, n = 10 12

4 Evaluate A. A = $32 264.98

5 Write a statement. The amount still owing after 10 years will be

Chapter 15 Reducing balance loans 725

a 1 (a) Find P, n, r and R. a P = 2800

726 Further Mathematics

Alternative method using a graphics calculator

a 1 (a) Find P, n, r and R. a P = 12 000

Chapter 15 Reducing balance loans 727

If using the TVM Solver on

4 Write a statement. The monthly repayment over a 4-year

b i 1 Find the amount owing after b i

(a) State P, n, R. P = 12 000, n = 9, R = 1.0065

2 Evaluate A9. A9 = $10 024.73

If using the TVM Solver on

3 Find the amount owing after 10 A10 = 12 000(1.0065)10

Continued over page

728 Further Mathematics