MAT112: BUSINESS MATHEMATIC

CHAPTER 2: MATHEMATICAL APPLICATION IN BANKING AND FINANCE

2.3 COMPOUND INTEREST

QUESTION 1
David deposited RM 5128.83 in a saving account at 8% compounded semi-annually. After X
years the amount is RM6000. Find X.
(5 marks)

P = RM 5128.83; t = X; k = 8% = 0.08, m = 2, S = RM 6000

𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚
0.08 2𝑋𝑋
RM 6000 = RM 5128.83 �1 + �
2
RM 6000
= (1.04)2𝑋𝑋
𝑅𝑅𝑅𝑅 5128.83
1.1699 = (1.04)2𝑋𝑋

log 1.1699 = log(1.04)2𝑋𝑋

log 1.1699 = 2Xlog(1.04)
log 1.1699
2𝑋𝑋 =
log 1.04
𝑋𝑋 = 2.0005 years

QUESTION 2
RM23500 was invested in a bank for 3 years 7 months. If the interest rate offered was 9.6%
compounded every two months, find the accumulated amount at the end of the investment
period.
(5 marks)

43
P = RM 23500; t = 3 years 7 months = years; k = 9.6% = 0.096, m=6
12
𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚
43
0.096 6×12
S = RM 23500 �1 + �
6
S = RM 33058.46
QUESTION 3
RM10000 was invested by Sarah for 7 years. The interest rate offered was 6% compounded
monthly. After 3 years, Sarah invested another RM5000. Find the accumulated amount of
her investment after 7 years.
(8 marks)

P1 = RM 10000; 𝑃𝑃2 = 𝑅𝑅𝑅𝑅 5000 𝑡𝑡1 = 7 years, 𝑡𝑡2 = 4 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

k = 6% = 0.06, m = 12

𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚
0.06 12×7
S1 = 𝑅𝑅𝑅𝑅10000 �1 + � = 𝑅𝑅𝑅𝑅 15203.70
12
0.06 12×4
S2 = 𝑅𝑅𝑅𝑅5000 �1 + � = 𝑅𝑅𝑅𝑅 12704.89
12
S = S1 + S2 = 𝑅𝑅𝑅𝑅15203.70 + 𝑅𝑅𝑅𝑅 12704.89 = 𝑅𝑅𝑅𝑅 27908.59

QUESTION 4
Helmi deposited RM 50,000 in a bank gives 7% interest compounded quarterly. The amount
in the account after t years was RM 87,110.67. Find

a) the interest amount.

(2 marks)
b) the value of t .
(5 marks)

ANSWER:

P = RM 50000; t = t; k = 7% = 0.07, m = 4, S = RM 87110.67

a) I = S − P = RM 87110.67 − RM50000 = RM 37110.67

𝑘𝑘 𝑚𝑚𝑚𝑚
b) S = P �1 + �
𝑚𝑚

0.07 4𝑡𝑡
RM 87110.67 = RM 50000 �1 + �
4
RM 87110.67
= (1.0175)4𝑡𝑡
𝑅𝑅𝑅𝑅 50000
1.74221 = (1.0175)4𝑡𝑡

log 1.74221 = log(1.0175)4𝑡𝑡

log 1.74221 = 4t log(1.0175)
log 1.74221
4𝑡𝑡 =
log 1.0175
𝑡𝑡 = 8 years
QUESTION 5
A father deposited RM 400 into an account that pays interest at 9% compounded monthly on
his son’s 5th birthday.

a) How much money in the account on his son’s 11th birthday?

(3 marks)
b) Determine the age of his son when the accumulated amount in the account is RM
1,836.75.
(4 marks)
ANSWER:

𝑘𝑘 𝑚𝑚𝑚𝑚
a) S = P �1 + �
𝑚𝑚

P = RM 400; t = 11 − 5 = 6 years; k = 9% = 0.09, m = 12

0.09 12×6
S = RM400 �1 + � = 𝑅𝑅𝑅𝑅 685.02
12
𝑘𝑘 𝑚𝑚𝑚𝑚
b) S = P �1 + �
𝑚𝑚

P = RM 400; k = 9% = 0.09, m = 12, S = RM 1836.75

𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚
0.09 12𝑡𝑡
RM 1836.75 = RM 400 �1 + �
12
RM 1836.75
= (1.0075)12𝑡𝑡
𝑅𝑅𝑅𝑅 400
4.5919 = (1.0075)12𝑡𝑡

log 4.5919 = log(1.0075)12𝑡𝑡

log 4.5919 = 12tlog(1.0075)
log 4.5919
12𝑡𝑡 =
log 1.0075
𝑋𝑋 = 17 years
Age of his son: 22 years old

QUESTION 6
Delisya deposited RM 4,200 at Merlin Bank that pays interst of k% compounded quarterly.
After four years, the accumulated amount was RM 5,996.01.

a) Find the interest earned.

(2 marks)
b) Find the value of k%.
(5 marks)
ANSWER:

P = RM 4200; t = 4 years; k = k%, m = 4, S = RM 5996.01

a) I = S − P = RM 5996.01 − RM4200 = RM 1796.01

𝑘𝑘 𝑚𝑚𝑚𝑚
b) S = P �1 + �
𝑚𝑚

𝑘𝑘 4×4
RM 5996.01 = RM 4200 �1 + �
4
RM 5996.01 𝑘𝑘 16
= �1 + �
𝑅𝑅𝑅𝑅 4200 4
𝑘𝑘 16
1.4276 = �1 + �
4
16 𝑘𝑘
√1.4276 = 1 +
4
𝑘𝑘
= 0.0225
4
𝑘𝑘 = 0.09 = 9%

QUESTION 7
Darwish deposited RM 10,000 in a bank that paid interest of 8% compounded monthly. Find

a) the accumulated amount at the end of eight years.

(3 marks)
b) the amount of interest earned by Darwish.
(2 marks)

ANSWER:

𝑘𝑘 𝑚𝑚𝑚𝑚
a) S = P �1 + �
𝑚𝑚

P = RM 10000; t = 8 years; k = 8% = 0.08, m = 12

0.08 12×8
S = RM10000 �1 + � = 𝑅𝑅𝑅𝑅 18924.57
12

b) I = S − P = RM 18924.57 − RM 10000 = RM 8924.57

QUESTION 8
An entrepreneur wants to make an investment of RM20000 for 10 years. He has two schemes
to consider.
SCHEME A SCHEME B
Offers an interest of 4.5% compounded Offers an interest of 4.5% compounded
every two months. semi-annually.

a) Calculated the accumulated amount at the end of 10 years for both schemes,
(8 marks)
b) Which scheme should he choose for investment and why?
(1 mark)

ANSWER:

a) Scheme A
𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚

P = RM 20000; t = 10 years; k = 4.5% = 0.045, m=6

0.045 6×10
S = RM20000 �1 + � = 𝑅𝑅𝑅𝑅 31313.62
6
Scheme B
𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚
P = RM 20000; t = 10 years; k = 4.5% = 0.045, m=2

0.045 2×10
S = RM20000 �1 + � = 𝑅𝑅𝑅𝑅 31210.18
2

b) Scheme A because the accumulated amount is higher than Scheme B.

QUESTION 9
Mia has just won a RM 50,000 cash price in an automotive design contest. She intended to
invest all the money as a retirement plan for 20 years. She has narrowed down her investment
to two option.

Option 1: Invest in Tabung Amanah saving account that offers 6.5% dividend compounded
annually.
Option 2: Invest in a fixed deposit Bank Amanah Rakyat that offers a return of 6% compounded
monthly.

As an investment consultant, use the future value to advise Mia which option she should
choose. (7 marks)
ANSWER:

OPTION 1: TABUNG AMANAH

𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚

P = RM 50000; t = 20 years; k = 6.5% = 0.065, m=1

0.065 1×20
S = RM50000 �1 + � = 𝑅𝑅𝑅𝑅 176182.25
1
OPTION 2: BANK AMANAH RAKYAT

𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚
P = RM 50000; t = 10 years; k = 6% = 0.06, m = 12

0.06 12×20
S = RM50000 �1 + � = 𝑅𝑅𝑅𝑅 165510
12

Mia should choose Tabung Amanah because the future value is higher than Bank Amanah
Rakyat.

QUESTION 10
Syahrul needs RM 60, 000 an plans to make a personal loan. He has two options to consider.

Bank A Bank B

Offers interest rate of 4.5% Offer an interest rate of 4.8%

compounded every three months. compounded semi-annually.

a) Calculate the future value at the end of 9 years for each bank.
(6 marks)
b) Which bank should he choose and why?
(1 mark)

ANSWER:

a) BANK A
𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚

P = RM 60000; t = 9 years; k = 4.5% = 0.045, m=4

0.045 4×9
S = RM60000 �1 + � = 𝑅𝑅𝑅𝑅 89754.97
4
 BANK B
𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚

P = RM 60000; t = 9 years; k = 4.8% = 0.048, m=2

0.048 2×9
S = RM60000 �1 + � = 𝑅𝑅𝑅𝑅 91949.73
2

b) Bank A because the interest is lower than Bank B.

QUESTION 11
MBC bank offers two interest rates for personal loan:

Offer Interest rate

1 5.5% compounded every two months
2 5.8% compounded semi-annually.

If Azhim wants to borrow RM 50,000 for five years.

a) Find the future amount for each offer.

(6 marks)
b) Determine which offer would Azhim choose and why?
(1 mark)

ANSWER:

a) OFFER 1
𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚

P = RM 50000; t = 5 years; k = 5.5% = 0.055, m=6

0.055 6×5
S = RM50000 �1 + � = 𝑅𝑅𝑅𝑅 65744.12
6

OFFER 2
𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚

P = RM 50000; t = 5 years; k = 5.8% = 0.058, m=2

0.058 2×5
S = RM50000 �1 + � = 𝑅𝑅𝑅𝑅 66546.28
2

b) Offer 1 because the interest is lower than offer 2.

QUESTION 12
Farhan made a loan form LP bank that charges 3.2% compounded quarterly. If the total
amount that he has to pay in 3 years and 3 months is RM 33,274.25, find the amount he
borrowed.
(3 marks)

S = RM 33274.25; t = 3 years 3 months = 3.25 years;

k = 3.2% = 0.032, m=4

𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚

0.032 4×3.25
RM 33274.25 = P �1 + �
4
RM 33274.25 = P (1.1091)
P = RM 30001.13

QUESTION 13
Adreanna made a loan of RM 50,000 from a bank that charges 4% compounded monthly.
After t years, the total amount that she has to pay is RM 71, 623.58. Find

a) the value of t .
(4 marks)
b) the amount of interest charged.
(1 mark)

ANSWER:
a) P = RM 50000; t = t; k = 4% = 0.04, m = 12, S = RM 71623.58

𝑘𝑘 𝑚𝑚𝑚𝑚
S = P �1 + �
𝑚𝑚
0.04 12𝑡𝑡
RM 71623.58 = RM 50000 �1 + �
12
RM 71623.58
= (1.0033)12𝑡𝑡
𝑅𝑅𝑅𝑅 50000
1.4325 = (1.0033)12𝑡𝑡

log 1.4325 = log(1.0033)12𝑡𝑡

log 1.4325 = 12𝑡𝑡 log(1.0033)
log 1.4325
12𝑡𝑡 =
log 1.0033
𝑡𝑡 = 9.091 years
b) I = S − P = RM 71623.58 − RM 50000 = RM 21623.58