MCR3U – Financial Applications Name:_________________________

UNIT 7
Financial Applications

Unit Expectations

- Calculate simple interest and make connections to linear growth

- Calculate compound interest and make connections to exponential growth
- Use the compound interest formula to calculate future value and present value of
an investment/loan under different compounding periods
- Use the compound interest formula to determine the annual interest rate and the
term of an investment/loan
- Calculate and compare the future value of an annuity with different periods
- Calculate and compare the present value of an annuity with different periods
- Calculate the regular deposit or payment amount of an annuity
- Use a TVM Solver to answer financial application problems involving different
compound periods and payment frequencies
MCR3U – Financial Applications Date:

Some Financial Math Terminology

Accrue to gain or to grow interest

Annum year (written as %/a which means 4.2% per annum or 4.2% per year)
Appreciate to increase in value
Bond A bond acts like a loan that is issued by a corporation, municipality or
government. The issuer promises to repay the full amount of the loan on a
specific date plus interest for the use of the money to the investor
Compound interest interest calculated on principal plus any previously earned interest
Compound period the interval at which interest is calculated
Depreciate to decrease in value
Down payment a partial amount of a purchase that is paid at the time of purchase
Future value a series of payments or investments made at regular intervals
GIC Guaranteed Income Certificate - an investment that pays a fixed rate of interest
for a set period, usually one to five years. GICs are guaranteed by the government
Interest the cost of borrowing or the money earned from an investment
Loan money that is borrowed
Mature the time when an investment can be cashed in or collected
Mutual Fund a fund operated by an investment company that raises money from shareholders
and invests it in stocks, bonds, options, commodities or money market securities
Present value the principal that would have to be invested now to get a desired future value
Principal a sum of money that is borrowed or invested
RESP Registered Education Savings Plan – an investment to save for post-secondary
school
RRIF Registered Retirement Income Fund – an investment that allows you to shelter
growth from taxes during retirement
RRSP Registered Retirement Savings Plan – an investment that allows you to save for
retirement on a tax-deferred basis. Contributions receive a tax deduction but
withdrawals are taxed
Simple interest interest calculated only on the initial sum of money invested or borrowed
Stock a long-term, growth-oriented investment representing ownership of shares in a
company
Term length of an investment or loan (in years)
TFSA Tax-free Savings Account – an investment that allows all growth and income to
accumulate tax-tree. Contributions receive no tax deduction but all withdrawals
can be made tax-free

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Simple Interest
 Interest earned is calculated only on the principal
 The graph of interest earned represents a linear relationship

The formula to calculate simple interest is: 𝑰 = 𝑷𝒓𝒕 and 𝑨 =𝑷+𝑰

𝑰 – Interest Earned
𝑷 – Principal amount (initial investment)
𝒓 –Interest Rate (as a decimal) per year
𝒕 – Time of the investment (in years)
𝑨 – Total Amount of an investment, including interest

Example 1 Calculate the following percent’s as decimals.

a) 5% b) 35% c) 0.5% d) 0.04%

Example 2 Convert the following times into years.

a) 36 months b) 520 weeks c) 300 days d) 1500 days

Example 3 Ester invests $2700 for 5 years in a simple interest account paying 4.5% interest. How much
interest will be earned at the end of the 5 years?

3
Example 4 Katia paid $165 in interest for borrowing a sum of money at a simple interest rate of 2 4 % for 4
years. How much did she borrow?

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Example 5 Alex made $35 in simple interest on an initial invest of $400. The interest rate was at 2.5%.
Determine how long he had the money invested.

Example 6 James borrows $1350 for 8 months. He pays $38.50 in simple interest for the loan. What was the
interest rate?

Example 7 Terry invests $5250.25 into an account that pays 0.95% simple interest. If she leaves the money
in the account for 1505 days, what is her investment now worth?

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Compound Interest
 Interest is calculated on the principal and any previously earned interest.
 The graph of interest earned forms an exponential relationship.

The formulas to calculate compound interest are:

𝑨 = 𝑷(𝟏 + 𝒊) 𝒏 𝑨 – The amount of the investment (Future Value)

𝑷 – Principal (Initial Investment or Present Value)
and
𝒊 – Interest rate per compounding period
𝑷 = 𝑨(𝟏 + 𝒊)−𝒏 𝒏 – Number of compounding periods

Frequency of Compounding Number of Compounds Per Year

Annual 1
Semi-Annual 2
Quarterly 4
Monthly 12
Semi-Monthly 24
Bi-Weekly 26
Weekly 52
Daily 365

Example 1 Determine the interest rate per compounding period for the following situations.
(divide the rate by the period – leave as fractions (no decimals))
a) 4% quarterly b) 8% weekly c) 10% daily

Example 2 Determine the number of compounding periods

(multiply the #years by the period – leave as fractions (no decimals))
a) Quarterly for 8 years b) Monthly for 5 years c) Weekly for 2.5 years

2
d) Semi-monthly for 2 years e) Bi-weekly for 6 months f) Daily for 3 of a year.

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Example 3 Rachel invests $5000 compounded monthly at 2.75%/a for 8 years. Determine the future value.

Example 4 Moira’s savings account earns 4.8%/a interest compounded daily. How much INTEREST will she
earn if she deposits $1670 in her account and keeps it there for 40 days?

Example 5 Paula borrows $650 for 5 years at an interest rate that is compounded quarterly. At the end of
the 5 years she owed $866.87. What was the interest rate per annum?

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Example 6 Sam cashes out an investment that has been in an account for 5 years and is now worth
$3151.68. The interest rate was 9.2% compounded quarterly.
a) Determine the initial investment.

b) How much interest was earned?

Example 7 An RRSP has $32644.15. It was locked in for 20 years at 4.8% compounded daily. How much was
initially invested?

Example 8 You have two options to invest $500. A simple interest account that pays 5% interest for 5 years
or a compound interest account that pays 4%/a compounded monthly for 5 years. Which of the
two accounts will earn the most money?

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Amount of an Annuity (Future Value)

Annuity A series of payments/investments made at regular intervals.

Future Value The sum of all regular payments and interest earned.

𝑭𝑽 – Future Value
𝑹[(𝟏 + 𝒊)𝒏 − 𝟏] 𝑹 – Regular Payment
𝑭𝑽 =
𝒊 𝒊 – Interest rate per compounding period
𝒏 – Number of compounding periods

Example 1 For 2 years, Mario deposits $40 every month into an account that earns 6%/a compounded
monthly.
a) Determine the future amount of this annuity.

b) How much interest was earned?

Example 2 Robert wants to have $5000 in 1.5 years. He plans to make biweekly payments into an account
that pays 2.5%/a compounded biweekly. How much will his regular payments be?

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Example 3 Joanna invests $1000 per quarter into an account that pays 5%/a compounded quarterly for 10
years. How much will the investment be worth after 10 years?

Example 4 Clarissa wants $100 000 for a down payment for a house. She plans to deposit $100 per week
into an account that pays 4.55%/a compounded weekly for 8 years.
a) Will she reach her goal with this current plan?

b) How much should her weekly payment be for her to reach her goal?

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Present Value of an Annuity

Present Value is the value of an annuity at the beginning of its term.

𝑷𝑽 – Present Value
𝑹[(𝟏 − (𝟏 + 𝒊)−𝒏 )] 𝑹 – Regular Payment
𝑷𝑽 =
𝒊 𝒊 – Interest rate per compounding period
𝒏 – Number of compounding periods

Example 1 Andrew would like to withdraw $500 per month from a retirement fund for 15 years after he
retires. If he earns 9.75%/a compounded monthly, how much must be in the account when he
retires?

Example 2 An annuity has an initial balance of $750 000 in an account that earns 3.0%/a compounded
monthly. What amount can be withdrawn monthly for the next 25 years?

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Example 3 John plans to retire in 25 years. He plans to have $1500 per month for 25 years after he retires.
His investment account offers 3.4%/a compounded monthly during the investment period (first
25 years) and 2.5%/a compounded monthly during the withdrawal period (second 25 years).
a) What monthly payments should John make for 25 years to have $1500 per month for his first 25 years of
retirement?

b) How much interest will John earn by the end of the 50 years?

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The TVM Solver

TVM stands for Time Value of Money. Using a TVM Solver allows us to perform financial calculations more
quickly AND run scenarios where the payment frequency is different from the compound period.
Go to: https://www.geogebra.org/m/jhyUqg2A

To use the solver, you input values for each variable and click the variable option that you want to find.
The variables in the TVM Solver are slightly different from those that we use in our calculations.

N is the number of payments in the term (# years * P/Y)

I% is the annual interest rate (as a percent)
PV is the present value or principal (enter as a negative value)
PMT is the regular payment amount (+ for withdrawals, – for deposits)
FV is the future value or final amount
P/Y is the # of payments per year
C/Y is the # of compound periods per year

Example 1 Lump Sum – Future Value

a) You have $2000 that you would like to deposit into an N= FV =
investment that pays 5.3%/a compounded monthly.
How much will the investment be worth after 10 years? I% = P/Y = 1
Fill in the TVM Solver fields to answer this question. PV = C/Y =
Highlight or circle the field that answers the question.
PMT = 0

b) What annual interest rate would you need in order for

N= FV =
your initial $2000 investment from above to double
after 10 years? I% = P/Y = 1
Fill in the TVM Solver fields to answer this question. PV = C/Y =
Highlight or circle the field that answers the question.
PMT = 0

c) Using this new annual interest rate, how long would it

N= FV =
take for your initial investment to triple in value?
I% = P/Y = 1
Fill in the TVM Solver fields to answer this question.
Highlight or circle the field that answers the question. PV = C/Y =
PMT = 0

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Example 2 Lump Sum – Present Value

a) Keesha bought a TV on deferred payment. Two years
N= FV =
later, she paid $1450 for the principal and the interest
that accrued during the term at 4.6%/a compounded I% = P/Y = 1
monthly. What was the purchase price of the TV?
PV = C/Y =
Fill in the TVM Solver fields to answer this question.
Highlight or circle the field that answers the question. PMT = 0

b) Using the purchase price calculated from above, how

N= FV =
much will Keesha need to pay at the end of the term if
the interest rate were 2% more per annum? I% = P/Y = 1
Fill in the TVM Solver fields to answer this question. PV = C/Y =
Highlight or circle the field that answers the question.
PMT = 0

Example 3 Future Value Annuity

a) Every month, Karl’s bank automatically transfers $100
N= FV =
from his chequing account into his savings account
that pays 5.5%/a compounded monthly. How much I% = P/Y =
will Karl have saved after 5 years?
PV = C/Y =
Fill in the TVM Solver fields to answer this question.
Highlight or circle the field that answers the question. PMT =

b) Using the same monthly deposit, interest rate and term

N= FV =
from above, how long will it take for Karl to save
$10,000? I% = P/Y =
Fill in the TVM Solver fields to answer this question. PV = C/Y =
Highlight or circle the field that answers the question.
PMT =

c) Using the same interest rate and term from above, how
N= FV =
long will it take for Karl to save $10,000 if he doubles his
regular monthly deposit amount? I% = P/Y =
Fill in the TVM Solver fields to answer this question. PV = C/Y =
Highlight or circle the field that answers the question.
PMT =

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Example 4 Present Value Annuity

a) Jillian wants a loan to buy a new car. She can manage
N= FV = 0
to make bi-weekly payments of $350. If the bank offers
her a 5-year loan at 7.75%/a compounded bi-weekly, I% = P/Y =
what is the maximum price of vehicle she can afford?
PV = C/Y =
Highlight or circle the field that answers the question.
PMT =

b) Jillian shops around to find a better rate for her loan.

N= FV = 0
She finds a bank that offers a rate of 4.25%/a
compounded bi-weekly. Using the price you calculated I% = P/Y =
above and the same payment amount she can afford,
how long will it take to pay off the loan? PV = C/Y =

Highlight or circle the field that answers the question. PMT =

c) Jillian finds a used 2 year old car that costs $28,000.

N= FV = 0
The dealer offers a great rate of 3.0%/a compounded
bi-weekly but with a term of 3 years or less. Can Jillian I% = P/Y =
afford the bi-weekly payment if she buys the car at
3.0%/a compounded bi-weekly for 3 years? PV = C/Y =

Highlight or circle the field that answers the question. PMT =

Annuities with Different Payment AND Compounding Periods

In all of the annuity calculations that we have done so far, the compounding period and the payment period
was the same. In reality, this is not always the case. A good example of this is a mortgage, which, in Canada,
always has semi-annual compounding, but you can make payments on a different schedule.

Example 5
a) Using the last scenario from example 4c above, suppose
N= FV = 0
the car dealer offered a rate of 3%/a compounded
MONTHLY, but Jillian still wanted to make bi-weekly I% = P/Y =
payments. How much would the monthly payment be?
PV = C/Y =
PMT =

b) Jillian decides that she wants to make WEEKLY payments FV = 0

N=
instead. How much would each weekly payment be?
I% = P/Y =
How much INTEREST does she save with weekly PV = C/Y =
payments and monthly compounding compared to
bi-weekly payments and bi-weekly compounding? PMT =
(i.e., compare example 4c with this example).
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Example 6 Mortgages
a) Mario and Dan purchase a home for $950 000. They N= FV = 0
make a down payment of $90,000 and mortgage the
rest. Their mortgage broker finds a rate of 5.45%/a I% = P/Y =
compounded semi-annually. She recommends PV = C/Y =
amortizing over 25 years with a term of 5 years.
PMT =
What will the regular payment be if they choose to pay
monthly?

b) Change the payment frequency to BI-WEEKLY and N= FV = 0

recalculate the regular payment.
I% = P/Y =
What will the regular payment be if they choose to pay
bi-weekly? PV = C/Y =
PMT =

c) Change the payment frequency to BI-WEEKLY and N= FV = 0

recalculate the regular payment.
I% = P/Y =
What will the regular payment be if they choose to pay
bi-weekly? PV = C/Y =
PMT =

d) Mario and Dan decided to go with WEEKLY payments. What will the outstanding balance be on the
mortgage at the end of the 5-year term? You will need to do a manual calculation for this.

e) When it comes time to remortgage at the end of the N= FV = 0

term, their broker finds that rates have dropped
significantly and they lock-in for another 5year term at I% = P/Y =
2.02%/a compounded semi-annually. They decide to do
PV = C/Y =
BI-WEEKLY payments this time. How much will their
regular bi-weekly payment be for the duration of the PMT =
term?

f) Calculate the remaining balance on their mortgage at the end of this 2 nd 5-year term.

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