Compound Interest [81 marks]
1.
Sophia pays $ 200 into a bank account at the end of each month. The
annual interest paid on money in the account is 3.1 % which is
compounded monthly.
(a)
Find the value of her investment after a period of 5 years.
[3]
Markscheme
* This sample question was produced by experienced DP mathematics
senior examiners to aid teachers in preparing for external assessment in
the new MAA course. There may be minor differences in formatting
compared to formal exam papers.
Number of time periods 12 ×5=60 (A1) N = 60
I% = 3.1
PV = 0
PMT = 200
P/Y = 12
C/Y = 12
Value ( $ ) 12 ,961.91 (M1)A1 [3 marks]
The average rate of inflation per year over the 5 years was 2 %.
(b)
Find an approximation for the real interest rate for the money invested
in the account.
[2]
Markscheme
METHOD 1 Real interest rate ¿ 3.1 −2.0=1.1% (M1)A1 METHOD 2
1+ 0.031
=1.01078 … (M1) 1.08 % (accept 1.1 %) A1 [2 marks]
1+ 0.02
(c)
Hence find the real value of Sophia’s investment at the end of 5 years.
[2]
Markscheme
N = 60
I% = 1.1
PV = 0
PMT = 200
P/Y = 12
C/Y = 12
( $ ) 12 ,300 ( 12 , 330.33 … ) (M1)A1 Note: Award A1 for $ 12 ,300 only.
[2 marks]
2.
Juliana plans to invest money for 10 years in an account paying 3.5 %
interest, compounded annually. She expects the annual inflation rate to
be 2 % per year throughout the 10-year period.
Juliana would like her investment to be worth a real value of $ 4000 ,
compared to current values, at the end of the 10-year period. She is
considering two options.
Option 1: Make a one-time investment at the start of the 10-year
period.
Option 2: Invest $ 1000 at the start of the 10-year period and then invest
$ x into the account
at the end of each year (including the first and last years).
(a)
For option 1, determine the minimum amount Juliana would need to
invest. Give your answer to the nearest dollar.
[3]
Markscheme
METHOD 1 – (with F V =4000 )
EITHER
N=10
I=1.5
FV =4000
P/Y=1
C/Y=1 (A1)(M1)
Note: Award A1 for ¿ seen and M1 for all other entries correct.
OR
10
4000= A ( 1+0.015 ) (A1)(M1)
Note: Award A1 for 1.5 or 0.015 seen, M1 for attempt to substitute into
compound interest formula and equating to 4000 .
THEN
¿ A1
Note: Award A0 if not rounded to a whole number or a negative sign given.
METHOD 2 – (With F V including inflation)
calculate FV with inflation
10
4000 × 1.02 (A1)
( ¿ 4875.977 … )
EITHER
10 10
4000 × 1.02 =PV ×1.035 (M1)
OR
N=10
I=3.5
FV =4875.977 …
P/Y=1
C/Y=1 (M1)
Note: Award M1 for their FV and all other entries correct.
THEN
¿ A1
Note: Award A0 if not rounded to a whole number or a negative sign given.
METHOD 3 – (Using formula to calculate real rate of return)
(real rate of return =) 1.47058 … ( % ) (A1)
EITHER
10
4000=PV ×1.0147058 … (A1)
OR
N=10
I=1.47058 …
FV =4000
P/Y=1
C/Y=1 (M1)
Note: Award M1 for all entries correct.
THEN
¿ A1
[3 marks]
(b)
For option 2, find the minimum value of x that Juliana would need to
invest each year. Give your answer to the nearest dollar.
[3]
Markscheme
METHOD 1 – (Finding the future value of the investment using P V from
part (a))
N=10
I=3.5
PV =3446.66 … (from Method 1) OR 3456.67 … (from Methods 2, 3)
P/Y=1
C/Y=1 (M1)
Note: Award M1 for interest rate 3.5and answer to part (a) as PV .
¿ OR $ 4875.97 (A1)
so payment required (from TVM) will be $ 294 OR $ 295 A1
Note: Award A0 if a negative sign given, unless already penalized in part
(a).
METHOD 2 – (Using F V )
N=10
I=3.5
PV =−1000
FV =4875.977 …
P/Y=1
C/Y=1 (A1)(M1)
Note: Award A1 for I=3.5 and FV =± 4875.977 …, M1 for all other entries
correct and opposite PV and FV signs.
¿ A1
Note: Correct 3sf answer is 295, however accept an answer of 296 given
that the context supports rounding up. Award A0 if a negative sign given,
unless already penalized in part (a).
[3 marks]
3.
Scott purchases food for his dog in large bags and feeds the dog the
same amount of dog food each day. The amount of dog food left in the
bag at the end of each day can be modelled by an arithmetic sequence.
On a particular day, Scott opened a new bag of dog food and fed his
dog. By the end of the third day there were 115.5 cups of dog food
remaining in the bag and at the end of the eighth day there were 108
cups of dog food remaining in the bag.
Find the number of cups of dog food
(a.i)
fed to the dog per day.
[3]
Markscheme
EITHER
115.5=u1 + ( 3 −1 ) ×d ( 115.5=u1 +2 d )
108=u1+ ( 8 −1 ) ×d ( 108=u 1+7 d ) (M1)(A1)
Note: Award M1 for attempting to use the arithmetic sequence term
formula, A1 for both equations correct. Working for M1 and A1 can be
found in parts (i) or (ii).
( d=−1.5 )
1.5 (cups/day) A1
Note: Answer must be written as a positive value to award A1.
OR
¿ (M1)(A1)
Note: Award M1 for attempting a calculation using the difference between
term 3 and term 8 ; A1 for a correct substitution.
¿ (cups/day) A1
[3 marks]
(a.ii)
remaining in the bag at the end of the first day.
[1]
Markscheme
¿ (cups) A1
[1 mark]
(b)
Calculate the number of days that Scott can feed his dog with one bag
of food.
[2]
Markscheme
attempting to substitute their values into the term formula for arithmetic
sequence equated to zero (M1)
0=118.5+ ( n− 1 ) × ( −1.5 )
¿ days A1
Note: Follow through from part (a) only if their answer is positive.
[2 marks]
In 2021, Scott spent $ 625 on dog food. Scott expects that the amount he
spends on dog food will increase at an annual rate of 6.4 %.
(c)
Determine the amount that Scott expects to spend on dog food in 2025.
Round your answer to the nearest dollar.
[3]
Markscheme
¿ (M1)(A1)
Note: Award M1 for attempting to use the geometric sequence term
formula; A1 for a correct substitution
$ 801 A1
Note: The answer must be rounded to a whole number to award the final
A1.
[3 marks]
(d.i)
10
Calculate the value of Σ ( 625 ×1.064(n −1) ).
n=1
[1]
Markscheme
¿ A1
[1 mark]
(d.ii)
Describe what the value in part (d)(i) represents in this context.
[2]
Markscheme
EITHER
the total cost (of dog food) R1
for 10 years beginning in 2021 OR 10 years before 2031 R1
OR
the total cost (of dog food) R1
from 2021 to 2030 (inclusive) OR from 2021 to (the start of) 2031 R1
[2 marks]
(e)
Comment on the appropriateness of modelling this scenario with a
geometric sequence.
[1]
Markscheme
EITHER
According to the model, the cost of dog food per year will eventually be too
high to keep a dog.
OR
The model does not necessarily consider changes in inflation rate.
OR
The model is appropriate as long as inflation increases at a similar rate.
OR
The model does not account for changes in the amount of food the dog
eats as it ages/becomes ill/stops growing.
OR
The model is appropriate since dog food bags can only be bought in
discrete quantities. R1
Note: Accept reasonable answers commenting on the appropriateness of
the model for the specific scenario. There should be a reference to the
given context. A reference to the geometric model must be clear: either
“model” is mentioned specifically, or other mathematical terms such as
“increasing” or “discrete quantities” are seen. Do not accept a contextual
argument in isolation, e.g. “The dog will eventually die”.
[1 mark]
4.
In this question, give all answers correct to 2 decimal places.
Raul and Rosy want to buy a new house and they need a loan of 170 000
Australian dollars ( A U D) from a bank. The loan is for 30 years and the
annual interest rate for the loan is 3.8 %, compounded monthly. They will
pay the loan in fixed monthly instalments at the end of each month.
(a)
Find the amount they will pay the bank each month.
[3]
Markscheme
N=360
I %=3.8
P V =( ± ) 170 000
F V =0
P/Y =12
C /Y =12 (M1)(A1)
Note: Award (M1) for an attempt to use a financial app in their technology
with at least two entries seen, award A1 for all entries correct. Accept a
positive or negative value for P V .
¿ A1
Note: Accept an answer of −792.13 . Do not award final A1 if answer is not
given correct to 2 dp.
[3 marks]
(b.i)
Find the amount Raul and Rosy will still owe the bank at the end of the
first 10 years.
[3]
Markscheme
N=120
I %=3.8
P V =( ± ) 170 000
P M T =( ∓ ) 792.13
P/Y =12
C /Y =12 (M1)(A1)
Note: Award (M1) for an attempt to use a financial app in their technology
with at least two entries seen, award A1 for all entries correct. P V and
P M T must have opposite signs.
¿ A1
Note: Do not award final A1 if answer is not given correct to 2 dp, unless
already penalized in part (a). Accept 133020.30 from use of exact value for
P M T.
[3 marks]
(b.ii)
Using your answers to parts (a) and (b)(i), calculate how much interest
they will have paid in total during the first 10 years.
[3]
Markscheme
amount of money paid: 120 ×792.13 ( ¿ 95055.60 ) (M1)
loan paid off: 170 000 −133019.94 (¿ 36980.06 ) (M1)
interest paid: ¿ AUD A1
Note: Allow 58075.60 or 58075.90 from use of some exact values from
parts (a) and (b)(i). If their answer to part (b)(i) is greater than 170 000 then
award at most (M1)(M1)(A0) for follow through in part (b)(ii).
[3 marks]
5.
Roger buys a new laptop for himself at a cost of £ 495. At the same time,
he buys his daughter Chloe a higher specification laptop at a cost of
£ 2200.
It is anticipated that Roger’s laptop will depreciate at a rate of 10 % per
year, whereas Chloe’s laptop will depreciate at a rate of 15 % per year.
(a)
Estimate the value of Roger’s laptop after 5 years.
[2]
Markscheme
5
£ 495× 0.9 =£ 292 ( £ 292.292 … ) (M1)A1
[2 marks]
Roger and Chloe’s laptops will have the same value k years after they
were purchased.
(b)
Find the value of k .
[2]
Markscheme
k
£ 495× 0.9 =2200× 0.85
k
(M1) k =26.1 ( 26.0968 … ) A1
Note: Award M1A0 for k −1 in place of k .
[2 marks]
(c)
Comment on the validity of your answer to part (b).
[1]
Markscheme
depreciation rates unlikely to be constant (especially over a long time
period) R1
Note: Accept reasonable answers based on the magnitude of k or the fact
that “value” depends on factors other than time.
[1 mark]
6.
Tommaso and Pietro have each been given 1500 euro to save for college.
Pietro invests his money in an account that pays a nominal annual
interest rate of 2.75 % , compounded half-yearly.
(a)
Calculate the amount Pietro will have in his account after 5 years. Give
your answer correct to 2 decimal places.
[3]
Markscheme
METHOD 1 N=5 OR N=10
I %=2.75 I %=2.75
P V =−1500 P V =−1500
P M T =0 P M T =0
P/Y =1 P/Y =2
C /Y =2 C /Y =2 (M1)(A1)
Note: Award M1 for an attempt to use a financial app in their technology,
( )
2×5
2.75
A1 for all entries correct. METHOD 2 1500 1+ (M1)
2 ×100
(A1) 1719.49 euro A1
[3 marks]
(b)
Tommaso wants to invest his money in an account such that his
investment will increase to 1.5 times the initial amount in 5 years.
Assume the account pays a nominal annual interest of r %
compounded quarterly.
Determine the value of r .
[3]
Markscheme
METHOD 1 N=5 OR N=20
P V =± 1500 P V =± 1500
F V =∓ 2250 F V =∓ 2250
P M T =0 P M T =0
P/Y =1 P/Y =4
C /Y =4 C /Y =4 (M1)(A1)
Note: Award M1 for an attempt to use a financial app in their technology,
A1 for all entries correct. P V and F V must have opposite signs.
( ) ( )
4 ×5 4 ×5
r r
METHOD 2 1500 1+ =2250 OR 1+ =1.5
4 ×100 4 × 100
(M1)(A1)
Note: Award M1 for substitution in compound interest formula, A1 for
correct substitution and for equating to 2250 (if using LHS equation) or to
1.5 (if using RHS equation).
r =8.19 ( 8.19206 … ) A1
Note: Accept r =8.19 %. Accept a trial and error method which leads
to r =8.19.
[3 marks]
7.
In this question, give all answers to two decimal places.
Bryan decides to purchase a new car with a price of €14 000, but cannot
afford the full amount. The car dealership offers two options to finance a
loan.
Finance option A:
A 6 year loan at a nominal annual interest rate of 14 % compounded
quarterly. No deposit required and repayments are made each quarter.
(a.i)
Find the repayment made each quarter.
[3]
Markscheme
N = 24
I % = 14
PV = −14000
FV = 0
P/Y = 4
C/Y = 4 (M1)(A1) Note: Award M1 for an attempt to use a financial
app in their technology, award A1 for all entries correct. Accept PV =
14000. (€)871.82 A1 [3 marks]
(a.ii)
Find the total amount paid for the car.
[2]
Markscheme
4 × 6 × 871.82 (M1) (€) 20923.68 A1 [2 marks]
(a.iii)
Find the interest paid on the loan.
[2]
Markscheme
20923.68 − 14000 (M1) (€) 6923.68 A1 [2 marks]
Finance option B:
A 6 year loan at a nominal annual interest rate of r % compounded
monthly. Terms of the loan require a 10 % deposit and monthly
repayments of €250.
(b.i)
Find the amount to be borrowed for this option.
[2]
Markscheme
0.9 × 14000 (= 14000 − 0.10 × 14000) M1 (€) 12600.00 A1 [2 marks]
(b.ii)
Find the annual interest rate, r .
[3]
Markscheme
N = 72 PV = 12600 PMT = −250 FV = 0 P/Y = 12 C/Y = 12 (M1)(A1)
Note: Award M1 for an attempt to use a financial app in their technology,
award A1 for all entries correct. Accept PV = −12600 provided PMT = 250.
12.56(%) A1 [3 marks]
(c)
State which option Bryan should choose. Justify your answer.
[2]
Markscheme
EITHER Bryan should choose Option A A1 no deposit is required
R1 Note: Award R1 for stating that no deposit is required. Award A1 for the
correct choice from that fact. Do not award R0A1. OR Bryan should choose
Option B A1 cost of Option A (6923.69) > cost of Option B (72 × 250 −
12600 = 5400) R1 Note: Award R1 for a correct comparison of costs.
Award A1 for the correct choice from that comparison. Do not award R0A1.
[2 marks]
(d)
Bryan’s car depreciates at an annual rate of 25 % per year.
Find the value of Bryan’s car six years after it is purchased.
[3]
Markscheme
( )
6
25
14 000 1− (M1)(A1)
100
Note: Award M1 for substitution into compound interest formula.
Award A1 for correct substitutions. = (€)2491.70 A1 OR N = 6 I% = −25
PV = ±14 000 P/Y = 1 C/Y = 1 (A1)(M1) Note: Award A1 for PV = ±14
000, M1 for other entries correct. (€)2491.70 A1 [3 marks]
8.
In this question, give all answers to two decimal places.
Bryan decides to purchase a new car with a price of €14 000, but cannot
afford the full amount. The car dealership offers two options to finance a
loan.
Finance option A:
A 6 year loan at a nominal annual interest rate of 14 % compounded
quarterly. No deposit required and repayments are made each quarter.
(a.i)
Find the repayment made each quarter.
[3]
Markscheme
N = 24
I % = 14
PV = −14000
FV = 0
P/Y = 4
C/Y = 4 (M1)(A1) Note: Award M1 for an attempt to use a financial
app in their technology, award A1 for all entries correct. Accept PV =
14000. (€)871.82 A1 [3 marks]
(a.ii)
Find the total amount paid for the car.
[2]
Markscheme
4 × 6 × 871.82 (M1) (€) 20923.68 A1 [2 marks]
(a.iii)
Find the interest paid on the loan.
[2]
Markscheme
20923.68 − 14000 (M1) (€) 6923.68 A1 [2 marks]
Finance option B:
A 6 year loan at a nominal annual interest rate of r % compounded
monthly. Terms of the loan require a 10 % deposit and monthly
repayments of €250.
(b.i)
Find the amount to be borrowed for this option.
[2]
Markscheme
0.9 × 14000 (= 14000 − 0.10 × 14000) M1 (€) 12600.00 A1 [2 marks]
(b.ii)
Find the annual interest rate, r .
[3]
Markscheme
N = 72 PV = 12600 PMT = −250 FV = 0 P/Y = 12 C/Y = 12 (M1)(A1)
Note: Award M1 for an attempt to use a financial app in their technology,
award A1 for all entries correct. Accept PV = −12600 provided PMT = 250.
12.56(%) A1 [3 marks]
(c)
State which option Bryan should choose. Justify your answer.
[2]
Markscheme
EITHER Bryan should choose Option A A1 no deposit is required
R1 Note: Award R1 for stating that no deposit is required. Award A1 for the
correct choice from that fact. Do not award R0A1. OR Bryan should choose
Option B A1 cost of Option A (6923.69) > cost of Option B (72 × 250 −
12600 = 5400) R1 Note: Award R1 for a correct comparison of costs.
Award A1 for the correct choice from that comparison. Do not award R0A1.
[2 marks]
(d)
Bryan chooses option B. The car dealership invests the money Bryan
pays as soon as they receive it.
If they invest it in an account paying 0.4 % interest per month and
inflation is 0.1 % per month, calculate the real amount of money
the car dealership has received by the end of the 6 year period.
[4]
Markscheme
real interest rate is 0.4 − 0.1 = 0.3% (M1) value of other payments
250 + 250 × 1.003 + … + 250 × 1.00371 use of sum of geometric sequence
formula or financial app on a GDC (M1) = 20 058.43 value of deposit at
the end of 6 years 1400 × (1.003)72 = 1736.98 (A1) Total value is (€) 21
795.41 A1 Note: Both M marks can awarded for a correct use of the
GDC’s financial app:
N = 72 (6 × 12)
I % = 3.6 (0.3 × 12)
PV = 0
PMT = −250
FV =
P/Y = 12
C/Y = 12
OR
N = 72 (6 × 12)
I % = 0.3
PV = 0
PMT = −250
FV =
P/Y = 1
C/Y = 1
[4 marks]
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