Financial mathematics practice

Interest, depreciation, loans and annuities.

Financial maths becomes easier when you identify the model, match the rate and time periods, and write the set-up before touching the calculator.

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What to recognise

  • Simple interest uses I = Prn
  • Compound growth repeatedly multiplies by a growth factor
  • Depreciation repeatedly multiplies by a factor below one
  • Loan and annuity questions depend on the payment period and interest period

Simple-interest example

Example question

$3,200 is invested at 5.4% per annum simple interest for 15 months. How much interest is earned?

  1. Hint 1Use I = Prn, where r is written as a decimal and n is measured in years.
  2. Hint 2Substitute P = 3200, r = 0.054 and n = 15 ÷ 12.
  3. Hint 3Evaluate 3200 × 0.054 × (15 ÷ 12).
Show the worked answer

I = 3200 × 0.054 × 1.25 = $216. The investment earns $216 interest.

The mistake to avoid

The rate and the time must use matching periods. If the rate is per annum, convert 15 months to 15 ÷ 12 years before calculating.