Mathematical Literacy Level 4 Module 9

Mathematical Literacy NQF 4 Downloaded from hlayiso.com Maths Lit NQF Level 4

Understanding interest Module 9 Downloaded from hlayiso.com Maths Lit NQF Level 4

Overview 9.1 Simple versus compound interest 9.2 Interest rates and the economy Downloaded from hlayiso.com Maths Lit NQF Level 4

Simple versus compound interest Unit 9.1 Interest is payable in two ways: When you borrow money from a financial institution, you pay 1 interest on the amount borrowed. When you invest money with a financial institution, you earn 2 interest on the amount invested. Downloaded from hlayiso.com Maths Lit NQF Level 4

Simple versus compound interest Unit 9.1 Simple interest Compound interest is calculated using the original is calculated on the principal amount (principal) amount only. plus all previous interest earned. Downloaded from hlayiso.com Maths Lit NQF Level 4

Example 9.1 page 184 Unit 9.1 Jo lends R2 000 to Mel. She charges him 6,25% simple interest per year. 1. If he borrows the money for two years, how much would he pay Jo in total? 2. If he pays back the money after 4 months, how much would he pay Jo in total? 3. How much would he have paid in interest if Jo charged him 6,25% compound interest? Downloaded from hlayiso.com Maths Lit NQF Level 4

Example 9.1 page 184 Unit 9.1 1. Interest paid for 1 year: 6,25% of R2 000 = R125 Interest paid for 2 years: R125 × 2 = R250 Total paid to Jo after 2 years: R2 000 + R250 = R2 250 2. Mel would pay 4 months’ worth of interest. 4 This means he would pay of a year’s interest. 12 Interest paid for 4 months: 4 × (6,25% of R2 000) 12 4 = × R125 = R41,67 12 He would pay Jo R2 041,67 Downloaded from hlayiso.com Maths Lit NQF Level 4

Example 9.1 page 184 Unit 9.1 3. For compound interest, the principal sum changes every time interest is added. Interest paid for first year: 6,25% of R2 000 = R125 The interest is added to the principal of R2 000. Principal amount for the second year = R2 125 Interest paid for second year: 6,25% of R2 125 = R132,81 The value of the loan after two years with interest compounded annually is: R2 000 + R125 + R132,81 = R2 257,81. Downloaded from hlayiso.com Maths Lit NQF Level 4

Exercise 9.1 Unit 9.1 Complete Exercise 9.1 on page 187 of your Student’s Book Downloaded from hlayiso.com Maths Lit NQF Level 4

Interest rates and the economy Unit 9.2 How do interest rates affect our economy? ORGANISATIONS RESERVE BANK lends money to lends money to of ORDINARY PRIVATE INDIVIDUALS SOUTH BANKS AFRICA BUSINESSES • The Reserve Bank determines the repo rate. This is the interest rate at which the Reserve Bank lends money to ordinary banks. • When the repo rate increases, banks increase their interest rates. • Private individuals are affected when the interest rate goes up. Downloaded from hlayiso.com Maths Lit NQF Level 4

Example 9.4 page 189 Unit 9.2 Sipho is a pensioner who lives off the interest on his investment. He has R560 000 in his investment. The bank reduces its interest rate on investments from 9,8% per year to 9,25% per year. Interest is calculated on a daily balance. 1. How will the drop in interest rate affect Sipho’s income? Explain. 2. Use a spreadsheet to compare Sipho’s income in a 30-day month at the old and new interest rates. Downloaded from hlayiso.com Maths Lit NQF Level 4

Example 9.4 page 189 continued … Unit 9.2 1. His income will be reduced because he will earn less interest. 2. Students should realise that they need to add the previous day’s interest to the previous principal sum for every calculation. Downloaded from hlayiso.com Maths Lit NQF Level 4

Example 9.4 page 189 continued … Unit 9.2 Downloaded from hlayiso.com Maths Lit NQF Level 4

How interest affects a housing loan Unit 9.2 • Most people need to borrow money from the bank to buy a house. A loan for a property is called a mortgage bond. • Financial institutions gain income from charging interest on home loans. • Financial institutions charge compound interest on home loans. • The bigger the loan (principal sum), the more interest you pay. As the loan reduces, the interest amount also reduces. • You can reduce the loan amount faster if you pay extra every month with your monthly instalment. The extra payment goes towards paying off the loan, not towards interest. Downloaded from hlayiso.com Maths Lit NQF Level 4

Study this graph below Unit 9.2 • The blue graph shows the bond payment. The straight line indicates that payments were made regularly (every month). Downloaded from hlayiso.com Maths Lit NQF Level 4

Study this graph below Unit 9.2 • The green graph shows the interest payment. Initially, almost the whole payment goes towards the interest charged. As the balance outstanding decreases, the interest also decreases. Downloaded from hlayiso.com Maths Lit NQF Level 4

Study this graph below Unit 9.2 • The black graph shows the amount outstanding on the bond. For the first year and a bit, the amount remains almost the same. This is because almost the whole payment goes to interest. Downloaded from hlayiso.com Maths Lit NQF Level 4

Exercise 9.2 Unit 9.2 Complete Exercise 9.2 on page 192 of your Student’s Book Downloaded from hlayiso.com Maths Lit NQF Level 4

Exercise 9.2 page 192 Unit 9.2 Downloaded from hlayiso.com Maths Lit NQF Level 4

Module assessment Module 9 Complete Module assessment on page 195 of your Student’s Book Downloaded from hlayiso.com Maths Lit NQF Level 4

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