SIMPLE ORDINARY ANNUITY

Annuity
 series of periodic payments (or receipts), usually made in equal amounts.

Payment Interval – the period of time between two successive payment dates.
Term of the annuity – the time between the beginning of the first payment interval and the end of the last payment
interval.

CLASSIFICATIONS OF ANNUITIES
1. Annuities Classified by Term
a. Annuity Certain. The term of annuity certain begins and ends on definite dates, such as a five-year term
from January 1, 2018 to January 1, 2019.
b. Perpetuity. The term of the perpetuity begins on a definite date but never ends, such as a principal that
remains forever untouched, drawing interest. The length of term is infinite.
c. Contingent Annuity. The term of contingent annuity begins on a definite date but the ending date is not
fixed in advance. Instead, the ending date depends on some condition happening in the future. For
example, life insurance premiums are paid only so long as the insured is living; the length of time is
therefore uncertain.
2. Annuities Classified by Dates of Payment
Ordinary Annuity, annuity due and deferred annuity are all annuities certain.
a. Ordinary Annuity. Periodic payments are made at the end of each payment interval.
b. Annuity Due. Periodic payments are made at the beginning of each payment interval.
c. Deferred Annuity. Periodic payments are made at the end of each payment interval. However, the term
of annuity does not begin until after a designated period of time.
3. Annuities Classified by Length of Payment Interval and Interest Compounding Periods
a. Simple Annuity. The payment interval coincides with the interest compounding period. In other words,
the interest is computed on payment date.
b. Complex Annuity or General Annuity. The payment interval does not coincide with the interest
compounding period

ORDINARY ANNUITY

Future Value of an Ordinary Annuity

( 1 + i )n – 1
FVOA = Pmt x
i
where:
FVOA = Future value of an ordinary annuity
Pmt = Annuity payment
i = interest rate per period (nominal rate / periods per year)
n = number of periods (years x periods per year)

Illustration #1:
What is the future value of an ordinary annuity of P1,000 per month, for 3 years, at 12% interest compounded monthly?
Present Value of an Ordinary Annuity
1 - ( 1 + i )-n
PVOA = Pmt x
i
where:
PVOA = Present value of an ordinary annuity
Pmt = Annuity payment
i = interest rate per period (nominal rate / periods per year)
n = number of periods (years x periods per year)

Illustration #2:
What is the present value of an ordinary annuity of P10,000 per month, for 4 years, at 12% interest compounded
monthly?

Illustration #3:
Find (a) the future and (b) the present value of an annuity of P2,000 payable at the end of each year for 20 years, if
money is worth 5.2% compounded annually.

Illustration #4:
The present value of an annuity for ten years is P10,000. Find the size of the quarterly payment if the interest rate is 8%
compounded quarterly.

Illustration #5:
The future value of an annuity for ten years is P10,000. Find the size of the quarterly payment if the interest rate is 8%
compounded quarterly.

Illustration #6:
At what nominal rate compounded quarterly will an annuity of P1,500 payable at the end of each quarter amount to
P66,000 in eight years?

Illustration #7:
The present value of an annuity of P2,000 payable at the end of every six months for 10 years is P30,000. What is the
nominal rate compounded semi-annually?

Illustration #8:
If P3,000 is deposited at the end of each month, how many months will be required for the deposits to amount to
P122,000, if the interest rate is 6% compounded monthly?

Illustration #9:
Alvin Anson borrows P40,000 and agrees to repay it by paying P2,000 at the end of each quarter. If the interest charged
is 8% compounded quarterly, how long will he have to pay?