UNIT 3 FURTHER MATHEMATICS

SUMMARY NOTES FOR THE VCAA EXAMS

WRITTEN BY A 99.95 STUDENT WHO

OBTAINED A 47 STUDY SCORE
 Data Analysis
Regression Analysis

1. Write down the EV and RV names as the list names

2. Enter data into lists
3. Construct a scatterplot (Set Graph)

4. Find the Least squares regression line (Calc > Regression > Linear Reg)

5. Write down the key results and graph residuals against EV to test linearity assumption

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 1
 Univariate Data
Categorical Variables: represents characteristics or qualities of people or things

• Nominal: data values that can be used to groups individuals according to a characteristic
Example. Eye Colour, Gender, Postal Code

• Ordinal: data values that can be used to both group and order individuals according to a
characteristic
Example. Fitness Level, Economic Status, Education Level

Numerical Variables: represents quantities and things that can be counted or measured

• Discrete: represents quantities that are counted in exact values

Example. Number of People, Pages in a book, Goals scored

• Continuous: represents quantities that are measured on a decimal scale

Example. Weight, Temperature, Costs to fill a tank with petrol

Frequency Table

• A listing of values a variable takes in a dataset, along with how frequently each value occurs

Example:

The sex of 11 preschool children is as shown (F = Female, M = Male):

FMMFFMFFFMM

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 2
Bar Chart

• Represents key information in a frequency tables as picture, which has bars of equal width and
spacing to represent each category

• Note: may be frequency or percentage frequency

Example:

The climate type of 23 countries is classified as ‘cold’, ‘mild’, or ‘hot’. Construct a frequency bar
chart to display this information using the data summarised in the table.

Segmented Bar Chart

• Bars that are stacked on top of one another to give a

single bar with several segments, with the length of
each being the frequency

• Legend is required to identify categories

Histograms

• A graphical display of information in a grouped frequency table with bars of equal width and
no spacing

Example:

Construct a histogram for the frequency table.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 3
Dot Plots

• Displays discrete numerical data for small data sets

Example:

The ages (in years) of the 13 members of a cricket team are:

22 19 18 19 23 25 22 29 18 22 23 24 22

Stem Plots

• Displays discrete and continuous data for small to medium sized data sets

Example:

University participation rates (%) in 23 countries are given below.

26 3 12 20 36 1 25 26 13 9 26 27 15 21 7 8 22 3 37 17 55 30 1

Which graph?

Categorical Bar chart 5-10 categories

Segmented bar chart Not too many categories (maximum 4-5)

Numerical Histogram Medium – large data sets (n ≥ 40)

Stem plot Small – medium data sets (n ≤ 50)

Dot plot Small data sets (n ≤ 20)

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 4
Median, Range and Interquartile Range

Median: middle value of the ordered data set

𝑛𝑛+1
• Located at the � � 𝑡𝑡ℎ position, where n = number of data values
2

• Measure of centre of a distribution

Range: difference between the largest and smallest value in the data set

• R = largest data value – smallest data value

• Measure of spread of a distribution, the maximum spread of the data values

Interquartile Range: the spread of the middle of the 50% of data values

• IQR = 𝑄𝑄3 − 𝑄𝑄1

`` Q1 is the midpoint of the lower half of the data values

Q2 is the median
Q3 is the midpoint of the upper half of the data values

Choosing the best measure of the centre of distribution

• Symmetric Distribution w/ no outliers >>> Range or IQR

• Skewed and/or outliers >>> IQR

Five Number Summary:

minimum, Q1, median, Q3, maximum

* Includes outliers *

Box Plots

• A graphical display of a five-number summary

• Note: label the number line and box plot

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 5
Outliers: 𝑄𝑄3 + (1.5 × 𝐼𝐼𝐼𝐼𝐼𝐼) 𝑜𝑜𝑜𝑜 𝑄𝑄1 − (1.5 × 𝐼𝐼𝐼𝐼𝐼𝐼)

Example:

Construct a box plot given the five-number summary and outliers.

Minimum 4
First Quartile 30
Median 36
Third Quartile 44
Maximum 92
Outliers 4, 70, 84, 92

Positively skewed: 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 > 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 > 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚

Comparing Distributions

Shape: symmetrical or skewed,

outliers

Centre: median, mean

Spread: IQR, range, outliers

Negatively skewed: 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 < 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 < 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚
*ALWAYS QUOTE DATA

Symmetric: 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 = 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 6
Measuring Centre of Distribution

Mean: the ‘average’ of a data set

𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝛴𝛴𝛴𝛴

• 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = 𝑜𝑜𝑜𝑜 𝑥𝑥̅ =
𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑛𝑛

• 𝛴𝛴, ‘sum of’

• 𝑥𝑥, to represent a data value
• 𝑥𝑥̅ , to represent the mean of the data values
• 𝑛𝑛, to represent the total number of data values.
• Measure of centre

Mean vs Median

• Mean is the BALANCE POINT of the distribution

• Median is the MIDPOINT of the distribution

Choosing the best measure of the centre of distribution:

• Symmetric Distribution w/ no outliers >>> Mean or Median (approximately equal in value)

• Skewed and/or outliers >>> Median (mean is drastically changed due to outliers)

• The value of the median is relatively unaffected by the presence of extreme values in a
distribution. For this reason, the median is frequently used as a measure of centre when the
distribution is known to be clearly skewed and/or likely to contain outliers.

Normal Distribution and the 68-96-99.7% Rule (Standard Deviation)

68-96-99.7% Rule

• 68% of the observations lie within one standard deviation of the mean
• 95% of the observations lie within two standard deviations of the mean
• 99.7% of the observations lie within three standard deviations of the mean.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 7
Standard Deviation:

�)𝟐𝟐
∑(𝒙𝒙−𝒙𝒙
• 𝒔𝒔 = � 𝒏𝒏−𝟏𝟏

• Measure of spread of the data

• Continuous data is almost symmetrical, or bell shaped

Example:

The distribution of delivery times for pizzas made by House of Pizza is approximately normal, with a
mean of 25 minutes and a standard deviation of 5 minutes.

Standard (z) scores:

𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 − 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑥𝑥 − 𝑥𝑥̅
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = 𝑜𝑜𝑜𝑜 𝑧𝑧 =
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑠𝑠

• Positive = above mean

• Negative = below mean
• Zero = equal to mean

Example:

The heights of a group of young women have a mean of ¯x = 160 cm and a standard deviation of s =
8 cm. Determine the standard or z-scores of a woman who is 150cm tall.

𝑥𝑥 = 150, 𝑥𝑥̅ = 160, 𝑠𝑠 = 8

𝑥𝑥 − 𝑥𝑥̅ 150 − 160 10

𝑧𝑧 = = =− = −1.25
𝑠𝑠 8 8

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 8
Example:

The means and standard deviations for VCE Further Maths score of two schools are given below.
Find the mark that has a z-score equally above Townson High mean as it is below City Secondary
mean.

Townson High School City Secondary College

Mean 48.08 89.84
Standard Deviation 16.64 11.33

𝑧𝑧1 = −𝑧𝑧2

𝑥𝑥 − 48.08 −𝑥𝑥 + 89.94

=
16.64 11.33

11.33𝑥𝑥 − 544.7464 = −16.64𝑥𝑥 + 1494.9376

27.97𝑥𝑥 = 2039.684
𝑥𝑥 = 72.92

∴ 𝑇𝑇ℎ𝑒𝑒 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑖𝑖𝑖𝑖 72.92

Population and Samples

• Population = Whole group

• Sample = Subset of the group
• Simple Random Sample = Every member of the group has an equal chance of being selected

Mean Standard Deviation

Population 𝑀𝑀 𝜎𝜎𝑥𝑥
Sample 𝑥𝑥̅ 𝑠𝑠𝑥𝑥

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 9
 Bivariate Data
Response Variable: the variable, which is being influenced, the dependent variable (y axis)

Explanatory Variable: the variable, which is influencing, the independent variable (x axis)

Note: When investigating the correlation between two variables, the Explanatory Variable is the
variable we expect to explain or predict the value of the Response Variable

Example:

Of the following pairs of variables, which are response, and which are explanatory?

Explanatory Response
Amount of alcohol consumed and reaction time Amount of Alcohol Reaction Time
Distance travelled, and time taken Distance Travelled Time Taken
Heart disease and amount of fat in diet Amount of Fat Heart Disease
Hours worked per week and salary Hours worked Salary

Two Way Frequency Table

• A statistical tool used to investigate associations between two categorical variables

Example:

According to the results summarized in the table, is there an association between support for
banning mobile phones in cinemas and the sex of the respondent?

Yes, the percentage of males in support of banning mobile phones in cinemas (87.9%) was
much higher than for females (65.8%).

Note. A difference of 5% is significant

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 10
Parallel Box Plots

• A statistical tool used for investigating associations between a numerical and categorical
variable

Example:

The parallel box plots below compare the salary distribution for four different age groups: 20–
29 years, 30–39 years, 40–49 years and 50–65 years.

Identify and Describing Associations

• Median

Example:

The parallel box plots show that median salaries and age group are associated because median
salaries increase with age group. For example, the median salary increased from $34 000 for
20−29 year-olds to $42000 for 50−65 year-olds.

• IQR and/or ranges

Example:

From the parallel box plots we can see that the spread of salaries is associated with age group.
For example, the IQR increased from around $12000 for 20−29-year-olds to around $20 000 for
50−65-year-olds.

• Shape

Example:

From the parallel box plots we can see that the shape of the distribution of salaries is
associated with age group because of the distribution, which is symmetric for 20−29-year-olds,
and becomes progressively more positively skewed as age increases. Outliers also begin to
appear.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 11
Parallel Dot Plots

• Used to investigate associations between numerical and categorical variables for small data
sets

Example:

Do the parallel dot plots support the contention that the number of sit-ups performed is
associated with completing the gym program? Write a brief explanation that compares
medians.

Yes; the median number of sit-ups performed after attending the gym program (M = 32) is
considerably higher than the number of sit-ups performed before attending the gym program
(M = 26). This indicates that the number of sit-ups performed is associated with completing the
gym program.

Back to Back Stem Plots

• Used to investigate associations between numerical and categorical variables for small data
sets

Example:

The back-to-back stem plot below displays the distribution of life expectancy (in years) for 13
countries in 2010 and 1970. Do the back-to-back stem plots support the contention that life
expectancy is increasing over time? Write a brief explanation based on your comparisons of
the two medians.

Yes: the median life expectancy in 2010 (M = 76 years) is considerably higher than the median
life expectancy in 1970 (M = 67 years). This indicates that life expectancy is increasing over
time.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 12
Scatterplots

• Used to investigate associations between two numerical variables

Direction and Outliers >>> Positive, Negative, No association

Form >>> Linear or Non-linear
Strength >>> Strong, Moderate, Weak, None

Example:

Construct a scatterplot using the data shown below.

Which graph – two variables?

Response variable Explanatory variable Graph

Segmented bar chart

Categorical Categorical Parallel bar chart
Two-way frequency

Parallel box plot

Numerical Categorical
Parallel dot plot

Back-to-back stem plot

Categorical
Numerical Parallel box plot
(two categories only)
Parallel dot plot

Numerical Numerical Scatterplot

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 13
Pearson’s Correlation Coefficient

∑(𝑥𝑥−𝑥𝑥̅ )(𝑦𝑦−𝑦𝑦�)
• 𝑟𝑟 = (𝑛𝑛−1)𝑆𝑆𝑥𝑥 𝑆𝑆𝑦𝑦

• Assumes that:

o Variables are numeric

o Association is linear
o No outliers in the data set

• When converting r2 to r, check whether the gradient is positive or negative

Strength of a Linear Relationship

Correlation of Determination

• Represented as 𝑟𝑟2, may be expressed as a decimal or percentage

• The coefficient of determination (as a percentage) tells us the variation in the response
variable that is explained by the variation in the explanatory variable

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 14
Correlation and Causality:

• Correlation tells you about the strength of association instead of the source or cause
• Finding out if one variable causes the other variable to occur
• Causation cannot exist without correlation; correlation can exist without causation

Non-Casual Explanation for Association

Common Response: association with a common third variable

Confounding Variables: two possible explanations for association but no way to detangle their
affects

Coincidence: association occurs by chance

Least Squares Regression Line

Fitting a straight line to bivariate data, minimising the sum of the squares of the residual

Residual: vertical distance between the actual data point and the regression line

• (Residual = Actual Data Value – Predicted Data Value)

• Takes into account every point on the scatterplot and is affected by outliers

• When fitting a least squares regression line, it is assumed that:

o Variables are numeric

o Association is linear
o No outliers in the data set

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 15
Interpreting the slope and the intercept of the regression line:

There is a STRENGTH DIRECTION FORM associations between RV and EV, (r=?).

Slope: On average, for every (one unit) increase in (x), (y) will (increase/ decrease) by (Gradient)

• If slope is positive: y increases as x increases

• If slope is negative: y decreases as x increases

Intercept: On average, (RV) is (Intercept) when (x) is 0

When using regression line to make predictions, substitute values into the equation

• Interpolation: predicting within the range of data, reasonably reliable

• Extrapolation: predictions outside the range of data, reasonable unreliable

Example:

Residual Plots

Linear: A random
collection of points
clustered around zero

Not Linear: A clear pattern

From the scatterplot we see that there is a strong negative, linear association between the price of a
second hand car and its age, r = −0.964. There are no obvious outliers.

The equation of the least squares regression line is: price = 35 100 − 3940× age.

The slope of the regression line predicts that, on average, the price of these second-hand cars
decreased by $3940 each year.

The intercept predicts that, on average, the price of these cars when new was $35 100.

The coefficient of determination indicates that 93% of the variation in the price of these second-
hand cars is explained by the variation in their age.

The lack of a clear pattern in the residual plot confirms the assumption of a linear association
between the price and the age of these second-hand cars.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 16
Transformations effects

 Squared: stretches out the upper end of the scale on an axis

 Log: compresses the upper end of the scale on an axis

 Reciprocal: compress the upper end of the scale on an axis but to a greater extent than the log
transformation

 Note: When transformations are applied include the transformed figure in the equation

Time Series Data:

• Trend (Increasing or Decreasing): tendencies for values for values in a time series to generally
increase or decrease over a significant period of time

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 17
• Cycles (Clear Pattern): periodic movements in a time series, but over a period greater than a
year

• Seasonal (Clear Pattern with equal spacing): periodic movement in a time series that has a
calendar-related period – for example a year, a month or a week.

• Irregular (Random) Fluctuations: variations in a time series that we cannot reasonably attribute
to systematic changes like trend, cycles, seasonality and structural change or an outlier.

• Structural Changes: sudden change in the established pattern of a time series plot

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 18
• Outliers: individual values that stand out from the general body of data

Smoothing: replacing individual data points in a time series to reduce random variation in data

Moving Mean Smoothing:

Note: To decide best number of groups for smoothing, count data values until trend changes

For two and four moving mean with centring:

𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝟏𝟏+𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝟐𝟐
Centring:
𝟐𝟐

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 19
Smoothing Time Series using Moving Medians

A way of smoothing time series quickly and graphically

Step 1. Identify middle x values of points

Step 2. Identify middle y-value of points
Step 3. Mark point where these two values reside

Seasonal indices:

𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑓𝑓𝑓𝑓𝑓𝑓 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠

𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 =
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎

 Sum = number of seasons

 Average is one
 Interpreting: convert to percentage (eg. 1.2 = 120%: is 20% higher than monthly/season average)
 Example:

A season index for unemployment for February is 1.2.

A season index of 1.2 tells during February tells us that Unemployment figures for February are
20% above the monthly average.

Deseasonalisation: account for effects of seasonality in a time series

𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 =
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 20
Correcting seasonality:

1
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖

Example:

Mikki runs a shop and she wishes to determine quarterly seasonal indices based on last year’s sales,
which are shown in the table opposite.

Fitting a trend line:

 Least squares regression

 Convert years to numbers and have an effective zero (ie. 2012 = 0)
 Seasonal usually is not linear

Forecasting: predict values in the future (based off trend line)

Forecasted value needs to be reseasonalised:

𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 = 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 × 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 21
The seasonal index for heaters in winter is 1.25.

To correct for seasonality, the actual heater sales in winter should be:

A: reduced by 20%
B: increased by 20%
C: reduced by 25%
D: increased by 25%
E: increased by 75%

To correct for seasonality: achieve a seasonal index of one

If the seasonal index is over one, the deseasonalised value is less; thus actual sales is reduced.
To find percentage;

1.25 − 1
× 100 = 20
1.25

OR

1
= 0.8 ∴ 1 − 0.8 = 0.2
1.25

Since 0.8 is less than one, it is a decrease. Therefore, decrease of 20%.

Describe the general pattern in rainfall that is revealed by the smoothed time series plot.
Until April, there is an increase in monthly rainfall. It then remains relatively constant for the
remainder of the year.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 22
 Recursion and Financial Modelling
Sequences: list of numbers written down in succession, with each number being a ‘term’

Recurrence Relations: mathematical rule used to generate a sequence

𝑉𝑉0 = 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇, 𝑉𝑉𝑛𝑛 + 1 = 𝑣𝑣𝑛𝑛 ± 𝐷𝐷

Example:

Generate the first five term of the sequence, showing the values of the first four iterations (each
time a rule is applied).

𝑉𝑉0 = 9, 𝑉𝑉𝑛𝑛 + 1 = 𝑉𝑉𝑛𝑛 − 4

𝑉𝑉0 = 9, 𝑉𝑉1 = 5, 𝑉𝑉2 = 1, 𝑉𝑉3 = −3, 𝑉𝑉4 = −7
∴ 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑖𝑖𝑖𝑖 9, 5, 1, −3, −7

Modelling Linear Growth and Decay: when a quantity increases or decreases by the same amount at
regular intervals

𝑉𝑉𝑛𝑛 + 1 = 𝑉𝑉𝑛𝑛 + 𝐷𝐷 ≫ 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ

𝑉𝑉𝑛𝑛 + 1 = 𝑉𝑉𝑛𝑛 − 𝐷𝐷 ≫ 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

Simple Interest

Interest: fee received or paid for lending or borrowing money

Principal: initial amount borrowed or invested

• Simple Interest Loans: borrow money from a bank and pay a fixed amount of interest to the
bank

• Simple Interest Investments: deposit money in a bank account and received a fixed amount of
interest from the bank

• Note: must have fixed amount and occur over regular time periods

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 23
Depreciation: reductions of an item’s value over time

Future Value: estimated value of an item after a certain period of time through taking into account
its potential depreciation

Scrap Value: when an item is n longer an asset and depreciated to a point where is it disposed or
sold

• Flat Rate Depreciation: constant amount is subtracted to decay the value of the asset after
every time period

• Unit Cost Depreciation: items losing value because of how often they are used, rather than its
age

Modelling Geometric Growth and Decay: when quantities increase or decrease by the same
percentage at regular intervals

𝑉𝑉𝑛𝑛 + 1 = 𝑅𝑅𝑅𝑅𝑛𝑛 𝑓𝑓𝑓𝑓𝑓𝑓 𝑅𝑅 > 1 ≫ 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ

𝑉𝑉𝑛𝑛 + 1 = 𝑅𝑅𝑅𝑅𝑛𝑛 𝑓𝑓𝑓𝑓𝑓𝑓 0 < 𝑅𝑅 < 1 ≫ 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

Compound Interest: any interest earned after one time period is added to the principal and then
contributes to the earned of interest in the next time period

Note: to determine interest rate which is not compounded annually through division. For example, if
it is compounded monthly, divide by 12

• Compound Interest Investment and Loans

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 24
• Reducing Balance Depreciation: form of depreciation, where the value of an asset decays
geometrically. Each year, the value will be reduced by a percentage, r%, of the previous year’s
value.

Rules for nth term in a sequence

Used to predict the value of the nth term (iteration) in the sequence without generating all of the
other terms.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 25
Nominal Interest Rates: compound interest rates quoted as annual rates or interest rates per
annum

Usually the nominal rate is stated, then a different time period is mentioned for which the interest is
calculated and paid. This is called the ‘compounding period’

It is assumed that:

• 12 equal months in every year

• 4 quarters in every year
• 26 fortnights in a year
• 52 weeks in a year
• 365 days in a year

Note: To convert nominal interest rate to compounding interest rate, divide by its respective
3.6
numbers, eg. Covert 3.6% per annum to a monthly rate. 12 = 0.3%

Effective Interest Rates: interest earned after one year expressed as a percentage of the amount
borrowed or invested

• Used to compare investment performance

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 26
Example:

Brooke would like to borrow $20000. She is deciding between two loan options:

• option A: 5.95% per annum compounding weekly

• option B: 6% per annum compounding quarterly.

USING CAS

convEff (Compounds per

year, Nominal IR %)

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 27
Modelling and Analysing Reducing Balance Loans and Annuities

Financial Solver

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 28
Combining Geometric Growth and Decay

𝑉𝑉0 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 , 𝑉𝑉𝑛𝑛 + 1 = 𝑅𝑅𝑉𝑉𝑛𝑛 ± 𝐷𝐷

Example:

The number of trout in a fish farm pond after n months, Tn, can be modelled using the recurrence
relation: 𝑇𝑇0 = 10000, 𝑇𝑇𝑇𝑇 + 1 = 1.1 × 𝑇𝑇𝑇𝑇 − 3000. After how many months will there be no trout
left in the pond?

∴ There will be no trout left in the pond after 5 months

Reducing Balance Loans: compound interest loan with regular payments

Example:

Alyssa’s loan can be modelled by the recurrence relation:

𝑉𝑉0 = 1000, 𝑉𝑉𝑉𝑉 + 1 = 1.0125𝑉𝑉𝑉𝑉 − 257.85, What is the balance of the loan (the amount she still
owes) after she has made two payments? Give your answer to the nearest cent.

∴ The balance of the loan is $506.23

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 29
Amortisation Loans: loans that are repaid by making regular payments until the balance is zero

• Part of each payment goes towards the interest owed on the unpaid balance.
• Remainder of payment used to reduce the unpaid balance.

Example:

Amortisation Process

Example:

Amortisation Table

Properties of a reducing balance loan

1. interest paid = interest rate per payment period × unpaid balance.

2. principal reduction = payment made - interest paid
3. balance of loan = balance owing - reduction in balance
4. cost of repaying the loan = the sum of the payments
5. total interest paid = total cost of repaying the loan – principal
6. The amount of interest paid from each payment decreases with payment number while the
amount of principal repaid increases.

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 30
Interest Only Loans: borrower only repays the interest which is charged, the value of the loan
remains the same

𝑟𝑟
𝐷𝐷 = 𝑉𝑉 Value of the Loan is the Same
100 0

𝑟𝑟
𝐷𝐷 > 𝑉𝑉 Value of the Loan Decreases
100 0

𝑟𝑟
𝐷𝐷 < 𝑉𝑉 Value of the Loan Increases
100 0

Example:

Jane borrows $50000 to buy some shares. Jane negotiates an interest-only loan for this amount, at
an interest rate of 9% per annum, compounding monthly. What is the monthly amount Jane will be
required to pay?

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 31
Annuities: form of investment, entitling the investors to a series of regular payments

Example:

Reza plans to travel overseas for 6 months. He invests $12000 in annuity that earns interest at the
rate of 6% per annum, providing him with a monthly income of $2035 per month for 6 months.

Model this annuity using a recurrence relation of the form:

𝑉𝑉0 = 𝑡𝑡ℎ𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝, 𝑉𝑉𝑉𝑉 + 1 = 𝑅𝑅𝑅𝑅𝑅𝑅 − 𝐷𝐷

where Vn is the value of the annuity after n payments have been received.

Example:

Amortisation Table for Annuity

Properties of annuities

1. interest earned = interest rate per compounding period × balance.

2. principal reduction = payment made − interest earned
3. balance of loan = previous balance − principal reduction
4. total return from the annuity = the sum of the payments made.
5. total interest earned = total payments received − principal

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 32
Perpetuities: type of annuity where the payment is the same as interest

Example:

Elizabeth invests her superannuation payout of $500000 into a perpetuity that will provide a
monthly income without using any of the initial investment.

If the interest rate for the perpetuity is 6% per annum, what monthly payment will Elizabeth
receive?

Annuity investments: compound interest investment with regular additions to the principal

• Increase the rate at which investment grows by making additional payments on a regular basis

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 33
Example:

Nor plans to travel overseas when she finishes her VCE. She has already saved $1200 and thinks that
she can save an additional $50 each month that she plans to add to her savings account. The account
pays interest at a rate of 3% per annum, compounding monthly.

Model this investment using a recurrence relation of the form

𝑉𝑉0 = 𝑡𝑡ℎ𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝, 𝑉𝑉𝑉𝑉 + 1 = 𝑅𝑅𝑅𝑅𝑅𝑅 + 𝐷𝐷 where Vn is the value of the investment after n payments
(additions to the principal) have been made.

Example:

Amortisation Table for Annuity Investment

Properties of an Annuity Investment

1. interest earned = interest rate per compounding period × previous balance

2. principal increase = payment made + interest earned
3. Balance of investment = previous balance + interest + payment made
4. total interest earned = balance of loan − (principal + additional payments)

 The School For Excellence 2021 Unit 3 Further Maths – A+ Student Generated Materials Page 34