Simple Annuities Definition of terms Annuity = is a sequence of equal payments made at equal periods for purposes of having a fund

or for paying a debt or loan. Examples: Monthly payments for rent, premiums on insurance, periodic pensions, monthly wages, interest payments on bonds and payments on installment purchases. Payment Interval = is the time between successive payments of an annuity. Periodic Payment = amount of each payment. Term = time between the first payment interval and the last payment. Types of Annuity 1. Annuity Certain = an annuity which payments begin and end at fixed time. Ex. Installment payments 2. Contingent Annuity = an annuity which payments depends upon some uncertain events. Ex. Life Insurance Premiums Types of Annuity Certain 1. Ordinary annuity = an annuity which payments are made at the end of each payment interval. The amount denoted by S of an ordinary annuity is the value at the end of the term. The amount denoted by A of an ordinary annuity is the value at beginning of the term. Derivation of Ordinary Annuity Formula
Ordinary Annuity

Amount Value S = R

(1 + i ) n 1 i Si n (1 + i ) 1

Present Value A = R

1 (1 + i ) n i

Periodic Payment R =

Ai R = n 1 (1 + i )

Examples: 1. A mother deposits P2, 500 in an educational trust company every 6 months for 4 years for her sons education. If the money is earns 18% compounded semiannually, how much will be in the fund after the last deposit?

2. A TV set is purchased with a down payment P2, 500 and the balance at P480 a month for 2 years. What is the cash value of the TV set if the interest rate is 16% compounded monthly? 3. Don is given P30, 000 six months before entering college which he invests at 18% compounded semi-annually. What semi-annual withdrawals, the first 6 months, for the following 5 years will this provide? 4. How many payments of P600 at the end of each month will be required to accumulate to P30, 000 if interest is earned at 12% compounded monthly? How much would be the final payment be made on the day of the last P600 deposit?