A first order recurrence relation for a sequence u0,u1,u2,…u_0, u_1, u_2, \dots is an equation that relates the general term unu_n with its preceding term un−1u_{n-1}. A student takes up a university study loan of 20 00020\,000 from a bank. The bank charges a 0.5%0.5\% interest rate per month. The interest is added on at the first day of each month. The student decides to make repayments monthly on the last day of each month. Each repayment is $450 except for the final repayment which will ultimately pay off the loan. Denoting the amount that he owes the bank at the end of the nnth month by unu_n, the above scenario can be represented by the following first order recurrence relation, un=1.005 un−1−450,n≥1.u_n = 1.005\,u_{n-1} - 450, \quad n \ge 1.

  1. ((i))

    Given that u0=20 000u_0 = 20\,000, use the recurrence relation to find u1u_1, u2u_2 and u3u_3.

  2. ((ii))

    The student attempts to rewrite the recurrence relation in the following way:

    un=1.005 un−1−450=1.005(1.005 un−2−450)−450=…u_n = 1.005\,u_{n-1} - 450 \\ = 1.005(1.005\,u_{n-2} - 450) - 450 \\ = \dots

    By applying the recurrence relation repeatedly and observing the pattern, show that unu_n can be expressed as 90000−1.005n(70000)90000 - 1.005^n(70000).

  3. ((iii))

    Determine the number of months required to repay the loan and find the final repayment.

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Worked solution

9((i))

1. Calculate $u_1$ by substituting $n=1$ and the initial value $u_0$ into the recurrence relation.

u1=1.005 u0−450u_1 = 1.005\,u_0 - 450
u1=1.005(20 000)−450u_1 = 1.005(20\,000) - 450
u1=20 100−450=19 650u_1 = 20\,100 - 450 = 19\,650

2. Calculate $u_2$ using the value of $u_1$.

u2=1.005 u1−450u_2 = 1.005\,u_1 - 450
u2=1.005(19 650)−450u_2 = 1.005(19\,650) - 450
u2=19 748.25−450=19 298.25u_2 = 19\,748.25 - 450 = 19\,298.25

3. Calculate $u_3$ using the value of $u_2$.

u3=1.005 u2−450u_3 = 1.005\,u_2 - 450
u3=1.005(19 298.25)−450u_3 = 1.005(19\,298.25) - 450
u3=19 394.74125−450=18 944.74125u_3 = 19\,394.74125 - 450 = 18\,944.74125
As this represents a monetary amount, rounding to 22 decimal places gives 18 944.7418\,944.74, though the exact value is acceptable.

Answer

u1=19 650u_1 = 19\,650, u2=19 298.25u_2 = 19\,298.25, u3=18 944.74u_3 = 18\,944.74 (or 18 944.7412518\,944.74125)

9((ii))

1. Iterate the recurrence relation to establish the emerging algebraic pattern.

un=1.005un−1−450u_n = 1.005 u_{n-1} - 450

Substituting un−1=1.005un−2−450u_{n-1} = 1.005 u_{n-2} - 450:
un=1.005(1.005un−2−450)−450u_n = 1.005(1.005 u_{n-2} - 450) - 450
un=1.0052un−2−450(1.005)−450u_n = 1.005^2 u_{n-2} - 450(1.005) - 450

Substituting un−2=1.005un−3−450u_{n-2} = 1.005 u_{n-3} - 450:
un=1.0052(1.005un−3−450)−450(1.005)−450u_n = 1.005^2(1.005 u_{n-3} - 450) - 450(1.005) - 450
un=1.0053un−3−450(1.0052)−450(1.005)−450u_n = 1.005^3 u_{n-3} - 450(1.005^2) - 450(1.005) - 450
un=1.0053un−3−450(1.0052+1.005+1)u_n = 1.005^3 u_{n-3} - 450(1.005^2 + 1.005 + 1)

2. Generalise the pattern to the $n$-th step, expressing $u_n$ in terms of $u_0$.

Repeating this process nn times yields:
un=1.005nu0−450(1.005n−1+1.005n−2+⋯+1.005+1)u_n = 1.005^n u_0 - 450(1.005^{n-1} + 1.005^{n-2} + \dots + 1.005 + 1)

3. Use the sum of a geometric progression to simplify the series portion.

The series (1+1.005+⋯+1.005n−1)(1 + 1.005 + \dots + 1.005^{n-1}) is a geometric progression with first term a=1a = 1, common ratio r=1.005r = 1.005, and nn terms.

Sn=a(rn−1)r−1=1(1.005n−1)1.005−1=1.005n−10.005S_n = \frac{a(r^n - 1)}{r - 1} = \frac{1(1.005^n - 1)}{1.005 - 1} = \frac{1.005^n - 1}{0.005}

4. Substitute the value of $u_0$ and simplify to obtain the final required form.

Given u0=20000u_0 = 20000:
un=20000(1.005n)−450(1.005n−10.005)u_n = 20000(1.005^n) - 450 \left( \frac{1.005^n - 1}{0.005} \right)
un=20000(1.005n)−90000(1.005n−1)u_n = 20000(1.005^n) - 90000(1.005^n - 1)
un=20000(1.005n)−90000(1.005n)+90000u_n = 20000(1.005^n) - 90000(1.005^n) + 90000
un=90000−70000(1.005n)(shown)u_n = 90000 - 70000(1.005^n) \quad \text{(shown)}

Answer

un=90000−1.005n(70000)(shown)u_n = 90000 - 1.005^n(70000) \quad \text{(shown)}

9((iii))

1. Set up an inequality to determine when the loan amount drops to zero or below.

un≤0u_n \le 0
90000−1.005n(70000)≤090000 - 1.005^n(70000) \le 0
1.005n≥90000700001.005^n \ge \frac{90000}{70000}
1.005n≥971.005^n \ge \frac{9}{7}

2. Solve for $n$ to find the number of months required.

nln⁡(1.005)≥ln⁡(97)n \ln(1.005) \ge \ln\left(\frac{9}{7}\right)
n≥ln⁡(9/7)ln⁡(1.005)n \ge \frac{\ln(9/7)}{\ln(1.005)}
n≥50.388n \ge 50.388
Since payments are made monthly, 51 months are required to fully repay the loan (as u50>0u_{50} > 0).

3. Calculate the outstanding loan balance at the end of the 50th month.

After 50 full regular payments of $450\char36{}450, the outstanding amount is:
u50=90000−1.00550(70000)u_{50} = 90000 - 1.005^{50}(70000)
u50≈90000−70000(1.283226)u_{50} \approx 90000 - 70000(1.283226)
u50≈174.1637u_{50} \approx 174.1637

4. Calculate the final repayment amount in the 51st month.

In the 51st month, the interest is added to the remaining balance before the final clearing repayment is made.
Final repayment=1.005×u50\text{Final repayment} = 1.005 \times u_{50}
=1.005×174.1637= 1.005 \times 174.1637
=175.0345= 175.0345
≈$175.03\approx \$175.03

Answer

Number of months = 51
Final repayment = $175.03\char36{}175.03

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