DECAY Simple Interest Compound Interest with Effective Interest Rates Compound Interest with Nominal Interest Rates Conversion Formula Timelines Simple & Compound Growth Simple Depreciation Compound Depreciation 1 SIMPLE INTEREST Interest is calculated on the original amount Interest remains constant over the period of time 2 You try! Peter invests R4 000 for a period of 6 years at 7,5% p.a. simple interest. Calculate the value of Peters investment at the end of the 6 years.
Example Paula would like to have R6 800 in her savings account at the end of 48 months. If she earns 12% simple interest p.a., determine how much she must initially invest.
3 COMPOUND INTEREST with EFFECTIVE INTEREST RATES Interest is calculated on the original amount plus the interest added at each time interval Effective interest rate is calculated per annum The Power of Compound Interest 4 You try! Romy borrows R12 500 for 2 years at 8,4% p.a. compounded. Determine how much Romy owes after 2 years. Example Ronan buys a car for R90 000 and wants to pay it back in 4 years at a compounded interest rate of 6% p.a. Determine how much interest Ronan ends up paying on the car.
5 COMPOUND INTEREST with NOMINAL INTEREST RATES 6 COMPOUND INTEREST with NOMINAL INTEREST RATES When working with nominal interest rates, the compound interest rate formula is altered to accommodate the different time intervals at which interest is calculated 7 You try! Liora invests R9 750 for 3 years at 6% p.a. compounded monthly. Determine the value of Lioras investment after 3 years. Example Determine how much Jason owes if he borrows R10 000 and pays it back over 2 years at an interest rate of 7,5% p.a. compounded quarterly. Working with Nominal Interest Rates 8 CONVERSION FORMULA To convert between effective & nominal interest rates: 9 You try! Which is the better interest rate for saving: 10,5% p.a. or 10,1% compounded quarterly? Example Which would be the better interest rate for a loan: 9,8% p.a. or 9,76% p.a. compounded monthly? Working with the Conversion Formula 10 TIMELINES Timelines are used to visualize multiple deposits / withdrawals and also multiple changes in interest rates
No marks are given for timelines but they are helpful!
Always remember to round-off your FINAL answer only results in greater accuracy! 11 R8 000 is deposited into a savings account. One year later, R1 500 is withdrawn. Calculate the value of the account at the end of 4 years, if interest is calculated at 11% p.a. compounded quarterly. Example T 0 T 1 T 4 11% p.a. compounded quarterly R8 000 (R1 500) ?? 12 Example (cont.) 13 You try! Matthew invests R20 000 into an account. Two years later, he makes another deposit of R45 000. The following year, he withdraws R17 000 to buy an entertainment system. If interest is calculated at 8,2% p.a. compounded monthly, determine how much Matthew has saved after 7 years. T 0 T 2 T 3 T 7 8,2% p.a. compounded monthly R20 000 R45 000 (R17 000) ?? 14 R1 700 is deposited into a savings account and earns interest at 7% p.a. compounded semi- annually. After 3 years, the interest rate goes up to 8,5% p.a. compounded quarterly. Determine the value of the account after 5 years. Example T 0 T 3 T 5 7% p.a. semi-annually 8,5% p.a. quarterly R1 700 ?? 15 Example (cont.) 16 You try! Kayla borrows R16 000. For the first 3 years, the interest is calculated at 5,5% p.a. compounded monthly. Thereafter, for the next 4 years, interest is calculated at 6,2% p.a. compounded daily. Determine how much Kayla owes after 7 years. T 0 T 3
T 7 5,5% p.a. monthly 6,2% p.a. daily R16 000 ?? 17 SIMPLE & COMPOUND GROWTH Real-life scenarios where growth occurs based on either the simple interest formula or the compound interest formula 18 You try! 5000 bacteria in a petri dish multiple at a rate of twice the original number every day. How many are there after a week.
Example A certain type of plastic expands at a rate of 4% per hour. If the volume of the plastic starts at 75 cm 3 , then determine the size after 6 hours. 19 SIMPLE DEPRECIATION Depreciation or decay occurs based on the simple interest formula Also known as Straight-line depreciation 20 Graph of Simple Depreciation Since depreciation is constant, it is a straight line graph e.g. Value of Computer 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 Year 1 Year 2 Year 3 Year 4 21 You try! A companys computer assets depreciate at 10% p.a. If the value started off at R20 000, determine the value of the assets after 3 years. Example If the depreciated value of a car is of the original value, determine the original cost of the car after 4 years, based on straight line depreciation of 7% p.a. 22 COMPOUND DEPRECIATION Depreciation or decay occurs based on the compound interest formula Also known as Reducing-balance depreciation 23 Graph of Compound Depreciation Since depreciation is exponential, it is a decreasing exponential graph e.g. 24 You try! A car worth R225 000 depreciates by 6,6% p.a. based on a reducing balance. Determine the value of the car after 4 years. Example Determine the original value of a companys assets if it depreciated to R144 000, after 3 years, at 4,5% p.a. compounded. Compound Growth and Decay Word Sums 25