SEKOLAH MENENGAH KEBANGSAAN DATO’ JAAFAR

MATHEMATICS (M) COURSEWORK 950/4

YEAR 2018

TITLE: APPLICATION OF GEOMETRIC SERIES IN FINANCIAL MODELLING

OF CREDIT CARD

NAME:

CLASS: SEMESTER 1 – MATH

I/C NUMBER:

TEACHER NAME:
INTRODUCTION
A geometric series is a series whose related sequence is geometric. It results from adding
the terms of a geometric sequence. The geometric series is a marvel of mathematics which rules
much of the natural world. For example, the intensity of radioactivity after n years of a given
radioactive material, the size of a population in exponential growth and the amount on savings
account. The geometric series can find perhaps its greatest predictive power.

Financial modeling is the task of building an abstract representation (a model) of a real

world financial situation. This is a mathematical model designed to represent (a simplified version
of) the performance of a financial asset or portfolio of a business, project, or any other investment.
Financial modeling is a general term that means different things to different users. Typically,
financial modeling is about translating a set of hypotheses about the behavior of markets or
agents into numerical predictions.

A credit card is a card issued by a financial company giving the holder an option to borrow
funds, usually at point of sale. Credit cards charge interest and are primarily used for short-
term financing. Interest usually begins one month after a purchase is made, and borrowing limits
are pre-set according to the individual's credit rating.

Borrowing limit also known as credit limit. Credit limit refers to the maximum amount
a credit card company allows a borrower to spend on a single card. Lenders usually set credit
limits based on information in the application of the person seeking credit.

Interest is the charge for the privilege of borrowing money, typically expressed as annual
percentage rate. Interest rate is the amount charged, expressed as a percentage of principal, by
a lender to a borrower for the use of assets. Principal in this situation refer to the original sum of
money borrowed in a loan. Interest rates are typically noted on an annual basis, known as
the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods,
large assets, such as a vehicle or building or equipment.

In the coursework, monthly interest rate and total payment under different payment
plans need to be investigated. A man paid the price of a computer amounted to RM8000 fully by
credit card. He determined not to use the card for any new transaction until the current balance
in his statement is fully settle. Payment of RM520 every month before the due date and other
payment plans for any amount greater than RM520 were used to create a repayment table which
included the month, interest due, payment, amount paid to principal and balance. Expressions for
the balance of first 3 months (b1, b2, b3) in terms of payment(R), monthly interest rate(i), month(n)
and original balance(b0) and the formula for bn, balance of the month were found. Then, the
month when the balance is paid off for each payment plan were found. Formula for b0, original
balance when bn=0 was expressed, the current balance is b0(1+i)(1+i+s/100)n-1 after n months was
showed and the month where current balance is doubled was found.
METHODOLOGY
To find the monthly interest rate, the formula of monthly interest rate below,

𝐴𝑛𝑛𝑢𝑎𝑙 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

ⅈ=
12
is used by substituting 18% of interest per annum into the Annual interest rate.

Then a repayment table with fixed amount of monthly payment was done. The table
showed with the credit debt for RM8000. The steps used to find interest due, amount paid to
principal and balance for six months is shown below:

Month, n Interest due Payment, R Paid to Balance, bn

(RM) (RM) principal (RM) (RM)
0 - - - 8000
1 120 520 400 7600
2 520
3 520
4 520
5 520
6 520
1) Use the monthly interest rate of 0.015% to multiply with the balance of the
previous month in order to obtain interest due.

2) Fixed amount of payment of the month subtracts the interest due of the month to
find the amount paid to principal of the month.

3) Balance of the previous month is used to subtract the amount paid to principal of
the month to get the current balance which is the balance of the month.
All the steps are used for month,n = 1,2,3,4,5,6 to complete the repayment table. The process
above was repeated twice by using different payment plans. The payment plans used are payment,
R=RM750 and payment, R=RM1000. Hence, another two repayment tables were created.

After that, the expressions for the balance of first 3 months b1, b2, b3 were derived by
using the first repayment table above which has a fixed payment of R=RM520 and writing as well
as simplifying the steps in terms of payment,R ,monthly interest rate,I ,month,n ,original
balance,b0. The formula of sum of finite geometric series,
𝑎(1−𝑟 𝑛 )
𝑠𝑛 = 1−𝑟
a = first term r = common ratio n = the number of terms
was used to simplify the expressions of the balance of first 3 months b1, b2, b3. Then, the formula
for balance of the month, bn is deduced by observing the simplified expressions of the balance of
first 3 months b1, b2, b3 especially theirs index power.

Next, we used the concept of balance of the month, bn ≤ 0 because when the balance is
paid off there will be no more amount remained unpaid. A formula of balance of the month, bn
which obtained from above was used too. Hence, another equation,
𝑅
𝑏0 (1 + ⅈ)𝑛 − ⅈ
[(1 + ⅈ)𝑛 − 1] ≤ 0
b0=original balance n=number of month i=monthly interest rate R=payment
was created to find the month when the balance is paid off. Substitution of values of
𝑚𝑜𝑛𝑡ℎ𝑙𝑦 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 = ⅈ which is 0.015 and payment,R=RM520, RM750 and RM1000 for
different payment plans into the formula help to obtain the month,n when the balance is paid off.
Logarithms was used in this.

On top of that, the formula,

𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − [(1 + ⅈ)𝑛 − 1] ≤ 0
ⅈ
b0=original balance n=number of month i=monthly interest rate R=payment
which obtained from above was substituted with the assumption of balance of the month, bn=0.
Then, the equation was rearranged into the formula of 𝑏0 in terms of payment,R ,monthly interest
rate,I and month,n to express balance,b0.

Subsequently, as the man doesn’t pay at all, so the payment,R=0 and was substituted in
to the formula,
𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − [(1 + ⅈ)𝑛 − 1] ≤ 0
ⅈ
b0=original balance n=number of month i=monthly interest rate R=payment
which obtained from above. As late payment charge only appears in the second month onwards,
the balance for the first month was calculated by multiplying the principal which is b0 with the
monthly interest charged which is (1+i). However, the balances for the second month onwards
were calculated by multiplying the balance of previous month with the monthly interest charged
which is (1 + i + s/100) because late payment charge of s% was fined. Hence, the current balance,
𝑠 𝑛−1
𝑏𝑛 = 𝑏0 (1 + ⅈ) (1 + ⅈ + 100)
bn=balance of month b0=original balance i=monthly interest rate s=late payment charge
n=number of the month
was able to be derived and showed.

Lastly, the equation 𝑏𝑛 ≥ 2𝑏0 ,was used to show that the month where current balance
is doubled. The formula,
𝑠 𝑛−1
𝑏𝑛 = 𝑏0 (1 + ⅈ) (1 + ⅈ + )
100
bn=balance of month b0=original balance i=monthly interest rate s=late payment charge
n=number of the month
that derived from above was used too. Thus, a new formula,
𝑛−1
2𝑏0 ≤ 𝑏0 (1 + ⅈ)(1 + ⅈ + 𝑠%)
b0=original balance i=monthly interest rate s=late payment charge n=number of the month
was derived and the values of late payment charge,s=1 and monthly interest rate,i=0.015 were
substituted into the formula. Logarithms was applied in this.
RESULTS
The monthly interest rate of the credit card was found by using a formula given which is
𝐴𝑛𝑛𝑢𝑎𝑙 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
ⅈ= 12
and interest per annum was given as 18%. Hence,

𝐴𝑛𝑛𝑢𝑎𝑙 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

Monthly interest rate, ⅈ =
12
18%
= 12

= 1.5%

1.5
= 100

= 0.015

The interest due, amount paid to principal and balance of the month were found by using
the monthly interest rate from above. Thus, a table was used to show the results by using the
payment plan of fixed payment of RM520.

𝑚𝑜𝑛𝑡ℎ𝑙𝑦 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒, ⅈ = 0.015 , 𝑝𝑎𝑦𝑚𝑒𝑛𝑡, 𝑅 = 𝑅𝑀520

Month, n Interest due Payment, R (RM) Paid to principal Balance, bn (RM)

(RM) (RM)
0 - - - 8000
1 120 520 400 7600
2 114 520 406 7194
3 107.91 520 412.09 6781.91
4 101.73 520 418.27 6363.64
5 95.45 520 424.55 5939.09
6 89.09 520 430.91 5508.18

Same method as above was used to construct another two tables with different payment
plans which are fixed payment of RM750 and RM1000.

𝑚𝑜𝑛𝑡ℎ𝑙𝑦 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒, ⅈ = 0.015 , 𝑝𝑎𝑦𝑚𝑒𝑛𝑡, 𝑅 = 𝑅𝑀750

Month, n Interest due Payment, R (RM) Paid to principal Balance, bn (RM)

(RM) (RM)
0 - - - 8000
1 120 750 630 7370
2 110.55 750 639.45 6730.55
3 100.96 750 649.04 6081.51
4 91.22 750 658.78 5422.73
5 81.34 750 668.66 4754.07
6 71.31 750 678.69 4075.38
𝑚𝑜𝑛𝑡ℎ𝑙𝑦 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒, ⅈ = 0.015 , 𝑝𝑎𝑦𝑚𝑒𝑛𝑡, 𝑅 = 𝑅𝑀1000

Month, n Interest due Payment, R (RM) Paid to principal Balance, bn (RM)

(RM) (RM)
0 - - - 8000
1 120 1000 880 7120
2 106.80 1000 893.20 6226.80
3 93.40 1000 906.60 5320.20
4 79.80 1000 920.20 4400
5 66 1000 934 3466
6 51.99 1000 948.01 2517.99

From the first table above, the expressions of b1, b2, b3 in terms of R, i, n, b0 were found.
𝑎(𝜎 𝑛 −1)
Then, a formula of bn was able to be derived by using the concept of 𝑠𝑛 = .
𝑟−1
a = first term r = common ratio n = the number of terms

b1 = 7600
= 8000 – [520-(8000 × 0.015)]
= b0 - (R – b0 × i)
= b0(1+i) – R

b2 = 7194
= 7600 – [520-(7600 × 0.015)]
= b1 – (R – b0 × i)
= b1(1+i) – R
= [ b0(1+i) – R ] (1+i) – R
= b0(1+i)2 -R(1+i) – R

b3 = 6781.91
= 7194 – [520-(7194 × 0.015)]
= b2 – (R – b0 × i)
= b2(1+i) – R
= [ b0(1+i)2 -R(1+i) – R ] (1+i) – R
= b0(1+i)3 -R(1+i)2 – R(1+i) – R

𝑎(𝜎 𝑛 −1)
𝑠𝑛 =
𝑟−1
b1 = b0(1+i) - R
b2 = b0(1+i)2 -R(1+i) – R
b3 = b0(1+i)3 -R(1+i)2 – R(1+i) – R

𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − ⅈ [(1 + ⅈ)𝑛 − 1]
 The balance is paid off when bn ≤ 0, by using the formula derived from above which is
𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − [(1 + ⅈ)𝑛 − 1] , the month when the balance is paid off can be found.
ⅈ
monthly interest rate,ⅈ = 0.015 original balance,𝑏0 = 8000

When the payment is RM520 every month,

𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − ⅈ [(1 + ⅈ)𝑛 − 1]
bn ≤ 0

520
8000(1 + 0.015)𝑛 − 0.015 [(1 + 0.015)𝑛 − 1] ≤ 0
520
8000(1.015)𝑛 − [(1.015)𝑛 − 1] ≤ 0
0.015
520 520
8000(1.015)𝑛 − (1.015)𝑛 + ≤0
0.015 0.015
520 520
(1.015)𝑛 (8000 − ) ≤ − 0.015
0.015
80000 520
(1.015)𝑛 (− )≤−
3 0.015
(1.015)𝑛 ≥ 1.3
𝑛
𝑙𝑜𝑔(1.015) ≥ 𝑙𝑜𝑔1.3
𝑛 𝑙𝑜𝑔(1.015) ≥ 𝑙𝑜𝑔 1.3
0.00647𝑛 ≥ 0.11394
𝑛 ≥ 17.61051
𝑛 = 18
the month when the balance is paid off is 18th month.

When the payment is RM750 every month,

𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − [(1 + ⅈ)𝑛 − 1]
ⅈ
bn ≤ 0

750
8000(1 + 0.015)𝑛 − 0.015 [(1 + 0.015)𝑛 − 1] ≤ 0
750
8000(1.015)𝑛 − 0.015 [(1.015)𝑛 − 1] ≤ 0
750 750
8000(1.015)𝑛 − 0.015 (1.015)𝑛 + 0.015 ≤ 0
750 750
(1.015)𝑛 (8000 − ) ≤−
0.015 0.015
750
(1.015)𝑛 (−42000) ≤ −
0.015
25
(1.015)𝑛 ≥
21
𝑛 25
𝑙𝑜𝑔(1.015) ≥ 𝑙𝑜𝑔 21
25
𝑛 𝑙𝑜𝑔(1.015) ≥ 𝑙𝑜𝑔 21
0.00647𝑛 ≥ 0.07572
𝑛 ≥ 11.70325
𝑛 = 12
th
the month when the balance is paid off is 12 month.
When the payment is RM1000 every month,
𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − ⅈ [(1 + ⅈ)𝑛 − 1]
bn ≤ 0

1000
8000(1 + 0.015)𝑛 − 0.015 [(1 + 0.015)𝑛 − 1] ≤ 0
1000
8000(1.015)𝑛 − 0.015 [(1.015)𝑛 − 1] ≤ 0
1000 1000
8000(1.015)𝑛 − 0.015 (1.015)𝑛 + 0.015 ≤ 0
1000 1000
(1.015)𝑛 (8000 − ) ≤ − 0.015
0.015
176000 1000
(1.015)𝑛 (− )≤−
3 0.015
25
(1.015)𝑛 ≥
22
25
𝑙𝑜𝑔(1.015)𝑛 ≥ 𝑙𝑜𝑔
22
25
𝑛 𝑙𝑜𝑔(1.015) ≥ 𝑙𝑜𝑔
22
0.00647𝑛 ≥ 0.05552
𝑛 ≥ 8.58114
𝑛=9

the month when the balance is paid off is 9th month.

𝑅
From the formula above, that 𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − [(1 + ⅈ)𝑛 − 1] and if 𝑏𝑛 = 0 , a new
ⅈ
equation was formed to find the formula of 𝑏0 .

𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − ⅈ [(1 + ⅈ)𝑛 − 1]
𝑏𝑛 = 0

𝑅
𝑏0 (1 + ⅈ)𝑛 − ⅈ [(1 + ⅈ)𝑛 − 1] = 0
𝑅 𝑅
− 𝑖̇ (1 + 𝑖̇)𝑛 + ⅈ + 𝑏0 (1 + ⅈ)𝑛 = 0
𝑅 𝑅
ⅈ
(1 + ⅈ)𝑛 − 𝑏0 (1 + ⅈ)𝑛 = 𝑖̇
(1 + 𝑛 𝑅 𝑅
ⅈ) ( 𝑖̇ − 𝑏0 ) = ⅈ
𝑅 𝑅
− 𝑏0 = (1 + ⅈ)−𝑛
ⅈ 𝑖̇
𝑅 𝑅
𝑏0 = ⅈ − ⅈ (1 + ⅈ)−𝑛
𝑅
𝑏0 = ⅈ [1 − (1 + ⅈ)−𝑛 ]
 𝑅
The formula from above 𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − ⅈ [(1 + ⅈ)𝑛 − 1] was used to derive a new
formula.When the man doesn’t pay at all , the payment, R = 0. Late payment charge of s% of the
current balance will appear in the second month onwards.

As payment, R = 0,
𝑅
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − [(1 + ⅈ)𝑛 − 1]
ⅈ
0
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛 − [(1 + ⅈ)𝑛 − 1]
ⅈ
𝑏𝑛 = 𝑏0 (1 + ⅈ)𝑛

𝑚𝑜𝑛𝑡ℎ, 𝑛 = 0, 𝑏𝑎𝑙𝑎𝑛𝑐𝑒, 𝑏0 = 𝑏0 (1 + ⅈ)0

𝑏0 = 𝑏0
𝑚𝑜𝑛𝑡ℎ, 𝑛 = 1, 𝑏𝑎𝑙𝑎𝑛𝑐𝑒, 𝑏1 = 𝑏0 (1 + ⅈ)1
𝑚𝑜𝑛𝑡ℎ, 𝑛 = 2, 𝑏𝑎𝑙𝑎𝑛𝑐𝑒, 𝑏2 = 𝑏0 (1 + ⅈ)(1 + ⅈ + 𝑠%)
𝑚𝑜𝑛𝑡ℎ, 𝑛 = 3, 𝑏𝑎𝑙𝑎𝑛𝑐𝑒, 𝑏3 = 𝑏0 (1 + ⅈ)(1 + ⅈ + 𝑠%)(1 + ⅈ + 𝑠%)
= 𝑏0 (1 + ⅈ)(1 + ⅈ + 𝑠%)2

𝑏𝑛 = 𝑏0 (1 + ⅈ)(1 + ⅈ + 𝑠%)𝑛−1
𝑠 𝑛−1
𝑏𝑛 = 𝑏0 (1 + ⅈ) (1 + ⅈ + 100)

(SHOWED.)

Given that s = 1, thus 𝑠% = 0.01

so, 𝑏𝑛 ≥ 2𝑏0 , because the current balance is doubled
The formula from above which is 𝑏𝑛 = 𝑏0 (1 + ⅈ)(1 + ⅈ + 𝑠%)𝑛−1 was used too.
𝐴𝑛𝑛𝑢𝑎𝑙 ⅈ𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
ⅈ= 12
𝑠=1 𝑏𝑛 ≥ 2𝑏0
ⅈ = 0.18÷12 𝑠% = 0.01
= 0.015

2𝑏0 ≤ 𝑏0 (1 + ⅈ)(1 + ⅈ + 𝑠%)𝑛−1

2𝑏0 ≤ 𝑏0 (1 + 0.015)(1 + 0.015 + 0.01)𝑛−1
2 ≤ (1.015)(1.025)𝑛−1
400
≤ 1.025𝑛−1
203
400
𝑙𝑜𝑔 ( ) ≤ (𝑛 − 1) 𝑙𝑜𝑔 1.025
203
0.29456 ≤ 0.01072𝑛 − 0.01072
0.30528 ≤ 0.01072𝑛
28.47761 ≤ 𝑛
𝑛 ≥ 28.47761
𝑛 = 29

The month where current balance is doubled is 29th month.

CONCLUSION
In the coursework, knowledge of mathematics especially geometric series was used to
complete this coursework. By using the formula of monthly interest rate given and annual interest
rate given as 18%, the amount of monthly interest rate found is 1.5%.

By using geometric series’ knowledges and formula, the interest due, amount paid to
principal and balance is calculated with different payment plans. The results were shown in tables.
We can see from the table that as the months go by, the interest due is decreasing, amount paid
to principal is increasing and balance of the month is reducing until the debts are cleared.

Based on the results of above, a formula of balance of the month, bn was able to be
deduced. The formula was deduced from the expressions of the balance of first three months (b1,
b2, b3) in terms of payment,R ,monthly interest rate,I ,month,n ,original balance,b0. Expressions of
them were derived from the table done. The formula of sum of finite geometric series,
𝑎(1−𝑟 𝑛 )
𝑠𝑛 = 1−𝑟
a = first term r = common ratio n = the number of terms
was used to simplify the expressions of the balance of first 3 months b1, b2, b3. Then, the formula
for balance of the month, bn is deduced by observing the simplified expressions of the balance of
first 3 months b1, b2, b3 especially theirs index power. As the months,n act as the number of terms
go by, since the interest due act as common ratio,r was decreasing, so the balance of the month
act as sum of finite geometric series was decreasing while the original balance act as first term
remained the same.

We knew that the balance is paid off when the sum of finite geometric series, 𝑠𝑛 or
balance of the month, bn ≤ 0. Hence, the formula of balance of the month, bn was used to
substitute information into it. Then, the month when the balance is paid off for each payment
plan was calculated. From the results, we can conclude that when the amount of payment is
bigger, the smaller the total interest due, the faster the debts is cleared.

If balance of the month, bn = 0, an expression of original balance, b0 was able to be derived

in terms of monthly interest rate,I ,month,n and payment,R by using the formula of balance of the
month, 𝑏𝑛 that obtained from above.

Based on the situation given, the formula of balance of the month,𝑏𝑛 was used to derive
and show another formula of balance of the month,𝑏𝑛 when the late payment charge of s% was
imposed after n months. The balance of the month was increasing as the months go by. After that,
by using the new formula of balance of the month, 𝑏𝑛 and 𝑏𝑛 ≥ 2𝑏0 to determine the month
where current balance is doubled. The result indicated that the balance can be doubled in 29th
month if the debt is not paid at all.
 DECLARATION

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