Test 2 – Week starting 13th May 2024

SUBJECT: Financial Mathematics MODULE CODE: STAV101

TIME: 70 minutes MARKS: 35

EXAMINERS: Prof G Sharp and Ms J Pauw

Maximum
Question no. 1 2 3 4 5
Mark

Marks allocated 8 8 6 8 5 35

Marks awarded

Student no.:

First name:

Surname:

Memorandum
1
The following multiple-choice questions are each awarded a maximum of two marks
Question 1 [2 marks per question = 8 Marks]

1.1 Find the equivalent effective monthly interest rate for a nominal interest rate of 16% per annum,
compounded annually.

(a) 1.2445% per month effective

(b) 0.1104% per month effective
(c) 1.2271% per month effective
(d) 1.333% per month effective
(e) 2.111% per month effective

1.2 A R175 000 loan is to be amortised by equal monthly payments over 5 years. If the interest rate is 12%
per annum compounded monthly, calculate the payments.

(a) R36 056.96

(b) R3 892.78
(c) R1 751.95
(d) R78 671.32
(e) R2 916.67

1.3 A vehicle has been purchased for R220 000. The expected value of the vehicle in 8 years’ time is R55 000.
The annual depreciation rate is (choose the correct option).
(a) 75.0%
(b) 9.4%
(c) 25.0%
(d) 18.9%
(e) 15.9%

1.4 A vehicle has been purchased for R220 000. If the cost of replacing the vehicle increases by 9% per annum
effective, the replacement value of the vehicle in 5 years’ time is (choose the correct option).
(a) R239 800
(b) R228 250
(c) R344 450
(d) R338 497
(e) R228 375

2
The following multiple choice questions are awarded a maximum of four marks per question

Question 2 [4 marks per question = 8 Marks]

2.1 A sinking fund is created to replace a vehicle in 7 years’ time. It is estimated that a new vehicle will cost
R450 000 in seven years’ time and the old vehicle will be sold at an estimated value of R55 000. In
addition, the fund must make provision for maintenance cost at a fixed rate of R8 000 per year. If the
sinking fund earns 7% per annum, compounded monthly, determine the amount that should be available
in the fund after 7 years.

(a) R451 000.00

(b) R72 041.11 (2 marks)
(c) R467 041.11 (4 marks)
(d) R1 291 906.46 (1 mark)
(e) R896 906.46
(f) R56 000.00

2.2 A student buys a second hand car at a cost of R45 000. The student takes out a loan with an interest rate
of 12% per annum, compounded monthly. The loan will be settled by 16 equal monthly installments of
R3 000 and a last payment of F < R3 000.
Determine the value of the last payment F.

(a) R1 520.11 (2 marks)

(b) R1 002.37 (4 marks)
(c) R2 252.00
(d) R898.56
(e) R1 897.50
(f) R992.45 (1 mark)

3
Question 3 [4, 2]
A housing loan of R900 000 is secured at an interest rate of 12% p.a. compounded monthly. The loan is to be
repaid monthly over the next 20 years, the first payment falling due one month after securing the loan. The
monthly payments are R9 909.78.

(a) Find the outstanding balance after the 20th payment has been made.

Finding OB at T20
𝑂𝑂𝑂𝑂 = 𝐹𝐹𝑣𝑣𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 − 𝐹𝐹𝑣𝑣𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚
(1 + 𝑖𝑖𝑚𝑚 )𝑘𝑘 − 1
= 𝑃𝑃𝑃𝑃(1 + 𝑖𝑖𝑛𝑛 )𝑛𝑛 − 𝑃𝑃𝑃𝑃 � �
𝑖𝑖𝑚𝑚

20
(1 + 0.01)20 − 1
= 900000(1 + 0.01) − 9909.78 � �
0.01
= 1098171.04 − 218203.49
= 𝑅𝑅879967.55

(b) Use your answer in (a) and draw up an amortization schedule for this loan for payment 21.
Payment nr Payment Interest Principal Outstanding balance
20 R879 967.55
21 R9 909.78 R8 799.68 R1 110.10 R878 857.45

4
Question 4 [8]
Mr and Mrs Smit are granted a loan of R900 000 from a bank. The bank fixes the interest rate at 9% p.a.
compounded monthly. Monthly loan repayments of R11 400.82 are to be made for the next 10 years, starting
one month after securing the loan.
Payments number 20 to 25 are missed due to unplanned circumstances. In addition to this, the interest rate
changes to 10% p.a. compounded annually at time period T24. Restructure the loan repayments so that the
missed payments are spread equally amongst the remaining payments. Determine the value of the new equal
payments.
HINT: Draw a time diagram
Step 1:

Finding OB at T19
OB Fvloan − Fv payment made
=
 (1 + im )k − 1 
= Pv (1 + in )
n
− Pt  
 im 
 
 (1 + 0.0075 )19 − 1 
= 900000 (1 + 0.0075 ) − 11400.82 
19

 0.0075 
 
1037286.08 − 231877.62
= 805408.46

Step 2:
Move OBT19 to T24
Fv= Pv (1 + i ) = 805408.46 (1 + 0.0075 ) = 836067.73
n 5

Step 3:
Find the equivalent effective interest rate:
1 1
i12 = (1 + i1 )12 − 1 = (1 + 0.1)12 − 1 = 0.00797414 = 0.797414% p.month effective

Step 4:
Move OBT24 to T25
Fv= Pv (1 + i ) = 836067.73 (1 + 0.00797414 ) = 842734.65
n 1

Step 5:
Future payments from T26 to T120
−1 −1
 1 − (1 + im )− k   1 − (1 + 0.00797414 )−95 
Pt Pv
=   842734.65  =  R12684.85
 im   0.00797414 
   

5
Question 5 [5]
An education trust is established to make annual disbursements in perpetuity with the first disbursement
exactly seven years after establishment. The trust has secured an investment of R1 250 000 at a fixed interest
rate of 7.5% per annum compounded annually. The trust plans to increase the annual disbursement by 5% per
annum effective.
Determine the value of the first payment.

Step 1:
Value of investment at T6

Fv= Pv (1 + i ) = 1250000 (1 + 0.075 ) = 1929126.91

n 6

Step 2:
Determine value of first payment
Pmt
= 1 Pv ( in − g )
1929126.91( 0.075 − 0.05 )
= R 48228.17

6
 STAV101: Formula Sheet

𝐼𝐼 = 𝑃𝑃𝑃𝑃 × 𝑖𝑖 × 𝑛𝑛

𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃 + 𝐼𝐼

𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃(1 + 𝑖𝑖 × 𝑛𝑛)

𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃(1 + 𝑖𝑖)𝑛𝑛

𝑚𝑚
𝑖𝑖𝑝𝑝 = (1 + 𝑖𝑖𝑚𝑚 ) 𝑝𝑝 − 1

𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃𝑒𝑒 𝑗𝑗𝑗𝑗

𝑖𝑖1 = 𝑒𝑒 𝑗𝑗 − 1

1 − (1 + 𝑖𝑖𝑚𝑚 )−𝑘𝑘
𝑃𝑃𝑃𝑃 = 𝑃𝑃𝑃𝑃 � �
𝑖𝑖𝑚𝑚

(1 + 𝑖𝑖𝑚𝑚 )𝑘𝑘 − 1
𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃 � �
𝑖𝑖𝑚𝑚

𝑃𝑃𝑃𝑃 1 + 𝑔𝑔 𝑘𝑘
𝑃𝑃𝑃𝑃 = �1 − � � � 𝑖𝑖𝑛𝑛 − 𝑔𝑔 > 0.
𝑖𝑖𝑛𝑛 − 𝑔𝑔 1 + 𝑖𝑖𝑛𝑛

𝑃𝑃𝑃𝑃
𝑃𝑃𝑃𝑃 =
𝑖𝑖𝑛𝑛

𝑃𝑃𝑃𝑃
𝑃𝑃𝑃𝑃 =
𝑖𝑖𝑛𝑛 − 𝑔𝑔