Australian Curriculum 12 General Mathematics - 2020 Edition
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6.02 Compound interest using the financial application
Lesson

Financial applications and compound interest

 

Most graphics and CAS calculators come with a built-in financial application which can be used to solve problems involving compound interest. These applications simply require you to enter in the known quantities (such as principal, interest, and number of compounding periods per year), and then the compound interest formula is applied or rearranged in the background to calculate the desired unknown quantity.

These financial applications typically use the following notation:

Financial solver input values
$N$N total number of payments
$I%$I% interest rate as a percentage per annum
$PV$PV the present value, or the principal
$PMT$PMT the value of any additional regular payment
$FV$FV the future value, or the final amount
$P/Y$P/Yor $PpY$PpY number of payments per year
$C/Y$C/Y or $CpY$CpY number of compounding periods per year

 

One point of difference between these solvers and the way we have been using the compound interest formula is that if you enter a positive value for $PV$PV then the solver will return a negative value for $FV$FV. This corresponds to borrowing: when you borrow you have a positive present value (the bank gives you money) but in the future you owe money to the bank, which is what the negative number represents. Conversely, if you enter a negative number for $PV$PV then the solver returns a positive $FV$FV - this corresponds to investing.

  • Borrowing money - the bank is giving you money - use positive value for $PV$PV
  • Investing money - you are giving your money to the bank - use negative value for $PV$PV

Another difference is that the solvers are set up to deal with regular payments in addition to the accumulation of interest. If there is no payment then we set $PMT$PMT to $0$0.  We also set $P/Y=C/Y$P/Y=C/Y (the number of compounds per year) and then $N$N (number of payments of zero) is equal to the total number of compounding periods. 

 

Worked example

Suppose $\$10000$$10000 is invested in an account earning interest at $6%$6% p.a. compounded quarterly. How much is in the account after $3$3 years?

Think: As we are compounding quarterly the number of compounding periods per year is $4$4, and so we set both $C/Y$C/Y and $P/Y$P/Y equal to $4$4. Then since the amount is invested for $3$3 years we have $N$N equal to $4\times3=12.$4×3=12. When solving a problem using a financial solver you should always write down the values you are entering into the calculator and indicate which value you are solving for.

Do:

$N$N $=$= $4\times3=12$4×3=12

There are $4$4 quarters per year, and $3$3 years.

$I$I $=$= $6$6

Input as a percentage per annum.

$PV$PV $=$= $-10000$10000

Negative because this is an investment  - we are giving the bank money.

$PMT$PMT $=$= $0$0

No payments are mentioned.

$FV$FV $=$= ?

This is the value we are trying to find.

$P/Y$P/Y $=$= $4$4

Set equal to $C/Y$C/Y, so that $N$N is equal to the number of compounds.

$C/Y$C/Y $=$= $4$4

Compounding quarterly: there are $4$4 quarters per year.

 

Once you have entered all the known values you can tap or move the cursor (depending on your calculator) to the unknown and the calculated value will appear: $FV=11956.18$FV=11956.18

Finally, we should interpret the result: there will be $\$11956.18$$11956.18 in the account after $3$3 years.

 

Select the brand of calculator you use below to view how the financial application appears in your calculator. 

Casio Classpad

How to use the CASIO Classpad to complete the following tasks using the inbuilt financial solver.

Consider an investment of $\$2000$$2000 at $5%$5% p.a. compounded monthly. 

Give your answers to two decimal places.

  1. Find the value of the investment after $4$4 years.

  2. Find the time required to earn $\$600$$600 in interest.

  3. What rate would be required to reach a savings goal of $\$2600$$2600 within $4$4 years?

TI Nspire

How to use the TI Nspire to complete the following tasks using the inbuilt financial solver.

Consider an investment of $\$2000$$2000 at $5%$5% p.a. compounded monthly. 

Give your answers to two decimal places.

  1. Find the value of the investment after $4$4 years.

  2. Find the time required to earn $\$600$$600 in interest.

  3. What rate would be required to reach a savings goal of $\$2600$$2600 within $4$4 years?

 

Practice questions

Question 1

$\$13000$$13000 is borrowed at an interest rate of $2.5%$2.5% p.a. compounded semi-annually. Find how much is owed after $3.5$3.5 years in dollars.

  1. Round your answer to the nearest cent.

Question 2

Nadia borrows $\$12000$$12000 at an interest rate of $3.5%$3.5% p.a. compounded weekly. If she makes no repayments, find the amount of interest that is owed after $3$3 years in dollars.

  1. Assume there are $52$52 weeks in a year.

    Round your answer to the nearest cent.

Question 3

Neil invests $\$900$$900 in a term deposit with a rate of $2.3%$2.3% p.a. compounded daily. How many years will it take for the investment to at least double in value?

  1. Assume there are $365$365 days in a year.

Outcomes

ACMGM096

with the aid of a calculator or computer-based financial software, solve problems involving compound interest loans or investments; for example, determining the future value of a loan, the number of compounding periods for an investment to exceed a given value, the interest rate needed for an investment to exceed a given value

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