SIMPLE

ANNUITIES
Learning Objectives
• Identify the types of annuities

• Find the amount of an ordinary annuity

• Find the present value and amount of an annuity

payment

• Calculate the known rate, time and periodic payment

• Find the equivalent cash price

• Find the amount of annuity due and deferred annuity

Annuity
Annuity is a series/sequence of payments (usually equal)
made at equal intervals of time.

 Installment payments

 Monthly payments/ rentals

 Insurance premiums

 Monthly retirement benefits

 Weekly/ monthly wages

Types of Annuity
 Annuity Certain

 Annuity payable for a definite duration

 Payments begin and end at fixed times

 Contingent Annuity or Annuity Uncertain

 Annuity payable for an indefinite duration (beginning

or termination is dependent on some certain event)

 Payments are not certain to be made

Types of Annuity
 Simple Annuity
 The interest conversion period (𝑚) is equal to the
payment interval (𝑝𝑖)
 𝑚 = 𝑝𝑖

 General Annuity
 The interest conversion period (𝑚) is not equal to
the payment interval (𝑝𝑖)
 𝑚 ≠ 𝑝𝑖
Classification of Simple Annuity
 Ordinary Annuity
 Annuity in which periodic payment (𝑅) is made at
the end of each payment interval.
 Annuity Due (A-due)
 Annuity in which periodic payment (𝑅) is made at
the beginning of each payment interval
 Deferred Annuity (A-def)
 Annuity in which periodic payment (𝑅) is neither at
the beginning nor end of each payment interval but
some later date.
Definition of Terms
 Payment Interval (𝒑𝒊) or Payment Period
 the period of time between successive payments of
annuity
 monthly (𝑚 = 12)
 quarterly (𝑚 = 4)
 semi-annually (𝑚 = 2)
 annually (𝑚 = 1)
 Term of Annuity
 the time from the beginning of the first payment interval to
the end of the last payment interval
 Periodic Payment
 the size of each annuity payment
Notations
𝑆 sum or amount of annuity
𝐴 present value of annuity
𝑅𝑠 periodic payment of the sum
𝑅𝑎 periodic payment of the present value
𝑡 term of annuity
𝑟 rate of an annuity
𝑛 conversion periods of the whole term (𝑡 × 𝑚)
𝑚 number of conversion periods per year
𝑟
𝑖 interest per conversion period
𝑚
Notations
𝑝𝑖 payment interval
𝐴𝑜 ordinary annuity
𝐴(𝑑𝑢𝑒) annuity due
𝐴(𝑑𝑒𝑓) deferred annuity
Ordinary Annuity
R R R R R R

0 1 2 3 𝒏−𝟐 𝒏−𝟏 𝒏

periods

Term of Ordinary
Annuity
Time Value of Money (TVM)
The idea that money available at the present time is
worth more than the same amount in the future due
to its potential earning capacity.

This core principle of finance holds that, provided

money can earn interest, any amount of money is
worth more the sooner it is received
Getting the Amount of Annuity (S)
Find the amount of a P5000 ordinary annuity
payable annually for four years if money is worth
5% effective.

To get the amount means to accumulate

𝐹 = 𝑃(1 + 𝑖)𝑛
Getting the Amount of Annuity (S)

𝑛
(1 + 𝑖) −1
𝑆 = 𝑅𝑠
𝑖
Getting the Present Value (A)
Find the present value of a P5000 ordinary annuity
payable annually for 4 years if money is worth 5%
effective.

To get the present value means to discount

𝑃 = 𝐹(1 + 𝑖)−𝑛
Getting the Present Value (A)

−𝑛
1 − (1 + 𝑖)
𝐴 = 𝑅𝑎
𝑖
Ordinary Annuity

Example 1

Find the amount and present value of P1,500

payable every three months for 6 years and
6 months if money is worth 6%.
Ordinary Annuity
Example 2

A car was bought with a down payment of

P200,000 and P18,000 at the end of every month
for 3 years to discharge all principal and interest at
the rate of 12% compounded monthly. Find the
cash value of the car.
Ordinary Annuity
Example 3

A man deposits P12,200 every end of 6

months in an account paying 5 ½%
compounded semi-annually. What amount is
in the account at the end of 9 years and 6
months?
Ordinary Annuity
Example 4

A home video entertainment set is offered for sale

for P18,000 down payment and P1800 every 3
months for the balance, for 18 months. If interest is
to be computed at 10% converted quarterly, what
is the cash price equivalent of the set?
Ordinary Annuity
Example 5

Mrs. Alvarez pays P250,000 cash and the

balance in 24 quarterly payments of P45,817
for a house and lot. If money is worth 10%
converted quarterly, what is the cash value
of the house and lot?
Ordinary Annuity
Example 6

At the end of each 6 months for 5 years, a father will deposit

P10,000 in a trust fund to provide for his daughter’s education
at the end of 5 years. If the money accumulates at 5.24%
compounded semiannually, how much will be in the fund

a.) at the end of 2 years?

b.) after the 7th deposit?

c.) after the last deposit?

Ordinary Annuity
Example 7

An LCD television set is purchased with a down

payment of P30,000 and P4,624.50 at the end of
each month for 2 years to discharge all principal
and interest at 15% compounded monthly. Find
the cash value of the television set.
Periodic Payment (R) of an
Ordinary Annuity

𝑆×𝑖
𝑅𝑠 = 𝑛
(1 + 𝑖) −1
𝐴×𝑖
𝑅𝑎 = −𝑛
1 − (1 + 𝑖)
Periodic Payment (R) of an
Ordinary Annuity
Example 1

How much monthly deposit must be made

for 5 years and 5 months in order to
accumulate P 120,000 at 15% compounded
monthly?
Periodic Payment (R) of an
Ordinary Annuity
Example 2

What amount of money will be paid at the end of

each quarter for 6 years and 6 months, if the
present value is P 50,500 and interest is paid at
10% compounded quarterly?
Periodic Payment (R) of an
Ordinary Annuity
Example 3

Dino wants to buy a car worth P 740,000. He can

pay 40% of the price as down payment and the
balance payable every end of the month for 60
months, how much must he pay monthly at 15%
compounded monthly?
Periodic Payment (R) of an
Ordinary Annuity
Example 4

Pam wants to have P 750,000 at the end of 5 years

for her graduation expenses. To achieve this, she
plans to deposit a certain sum at the end of each
month. If her bank pays 15% compounded monthly,
what should be the amount of her monthly deposit?
Periodic Payment (R) of an
Ordinary Annuity
Example 5

On May 31, 2007, Connie invested P 185,000 at

10% compounded monthly. The investment is to
be paid out in 90 equal monthly payments with the
first payment on June 30,2007. What is the size of
each monthly payment?
Periodic Payment (R) of an
Ordinary Annuity
Example 6

How much must be paid for 48 months to

settle an obligation of P 123,400, if money is
worth 12% compounded monthly?
SEATWORK:
1. A fund is to be created by investing P2,800 at the end of every
month for 5 years and 10 months. If money is worth 10%
compounded monthly, how much is in the fund at the end of the
term?
2. Find the cash value of a sala set that can be bought for P15,000
down payment and P1,500 a month for 48 months, if money is
worth 14% compounded monthly.
3. An alumnus of a certain school wants to provide a P 180,000
research fellowship at the end of each year for the next 10 years. If
the school can invest money at 10% m = 1, how much should the
man give now to set up a fund for the scholarship?
SEATWORK:
4. Cocoy wants to accumulate P 230,000 in 9.5 years. Equal deposits
are made at the end of each quarter in an account that pays 15%
compounded quarterly. What is the size of each deposit?
5. A P50,000 loan is payable in 3 years. To repay the loan, the debtor
must pay an amount every 6 months with an interest rate of 6%
compounded semi-annually. How much should he pay every six
months?
Annuity Due (𝑨 − 𝒅𝒖𝒆)
 Annuity in which periodic payment (𝑅) is made
at the beginning of each payment period.

 The term of an annuity due starts at the time of

the first payment and ends one payment period
after the date of the last payment.
Annuity Due (𝑨 − 𝒅𝒖𝒆)
R R R R R R

0 1 2 3 𝒏−𝟐 𝒏−𝟏 𝒏

A S
Annuity Due (𝑨 − 𝒅𝒖𝒆)
ഥ ) of 𝐴 − 𝑑𝑢𝑒 is the value on
 The present value (𝐀
the day of the first payment.
ത is the sum of the accumulated
 The amount (𝐒)
value of the payments at the end of the term
Sum and Present Value of 𝑨 − 𝒅𝒖𝒆

(𝑛+1)
(1 + 𝑖) −1
𝑆ҧ = 𝑅𝑠 −1
𝑖
1 − (1 + 𝑖)−(𝑛−1)
𝐴ҧ = 𝑅𝑎 +1
𝑖
Annuity Due (𝑨 − 𝒅𝒖𝒆)
NOTE:
Problems that involve expenses and cash are

A problems, and problems that involve income or

revenue are S problems.
Annuity Due (𝑨 − 𝒅𝒖𝒆)
Example 1

Heart wants to buy a computer set within a year.

She decides to make regular deposits of P3,000 at
the start of every month, her money earning 5%
compounded monthly. How much will she have in
her savings a year after?
S Problem
Annuity Due (𝑨 − 𝒅𝒖𝒆)
Example 2

Find the cash equivalent of an item that was

purchased for P18,000 down payment and P2,500
at the beginning of each six months for 3½ years,
if interest is 5½ % compounded semi-annually.

A Problem
Annuity Due (𝑨 − 𝒅𝒖𝒆)
Example 3

Nette bought a brand new car. What is the cash

price of the car if she has to make 36 quarterly
payments of P22,000 at the beginning of each
quarterly period at 10.5% compounded quarterly?

A Problem
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
 Annuity in which periodic payment (𝑅) is neither
at the beginning nor end of each payment
interval but some later date.

 Deferment period is the length of time for which

there are no payments.

 First payment occur after the deferment period.

Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
R R R

0 1 2 3 𝒌 𝒌+𝟏 𝒌+𝟐 𝒌+𝒏

A S
Period of Ordinary Annuity
deferment of 𝑛 payments
Present Value of 𝑨 − 𝒅𝒆𝒇
 The value of the annuity at point 0
 Compute the present value (𝑨) of the ordinary
annuity of the 𝒏 payments of 𝑹 at point 𝒅
 Discount 𝑨 for 𝒅 periods
𝒏 = number of payments made
𝒅 = number of payments missed

1− 1+𝑖 −𝑛
𝐴𝑑 = 𝑅 1+𝑖 −𝑑
𝑖
Sum or Amount of 𝑨 − 𝒅𝒆𝒇

𝑑+𝑛
𝑆𝑑 = 𝐴𝑑 1 + 𝑖
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 1

Find the present value of a deferred annuity of

P900 every three months for 5 years that is
deferred for 3 years, if money is worth 10%
compounded quarterly.
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 2

Find the present value of a deferred annuity of

P4,800 every six months for 7 years, if the first
payment is made after 4 years, and money is
worth 11% compounded semi-annually.
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 3

In a series of quarterly payments of P5,700 each,

the first payment is due at the end of 5 years and
the last at the end of 10 years and 9 months. If
money is worth 6% compounded quarterly, find the
present value of the deferred annuity.
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 4

Find the present value of an annuity of P33,000

payable at the end of each year if the first payment
is made at the end of 3 years and the last payment
is made at the end of 9 years. Assume money is
worth 10% effective.
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 5

Find the present value of 10 semi-annual

payments of P3,000 each if the first payment is
due at the end of 3 1/2 years and money is worth
12% compounded semi-annually.
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 6

Find the present value of a P4,500 annuity payable

annually for 7 years and is deferred for 2 years if
money is worth 8% effective.
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 7

A house costs P1.3 million cash. A buyer bought it

by paying P300,000 down payment and would pay
48 monthly installments, the first of which is due at
the end of 1 year. If the rate of interest is 20.4%
compounded monthly, what is the monthly
installment?
Deferred Annuity (𝑨 − 𝒅𝒆𝒇)
Example 8

Find the quarterly payment for 21 quarters to

discharge an obligation of P120,000 if money is
worth 4 1/2% compounded quarterly and the first
payment is due at the end of 3 years and 9
months.
SEATWORK:
1. An investment of P5,500 is made at the beginning of each month
for 5 years and 5 months. If interest is 15% compounded monthly,
how much will the investment be worth at the end of the term?
2. Polly purchased a car. He paid P 150,000 as a down payment, and P
5,500 payable at the beginning of each month for 48 months. If
money is worth 12% compounded monthly, what is the equivalent
cash price of the car?
3. Pompei will pay off a debt of P 120,000 by equal payments every
beginning of each quarter for 10 years. If interest is charged at 11%
compounded quarterly, what will be the size of each payment?
SEATWORK:
4. Find the present value of a series of quarterly payments of P 950
each, the first payment is due at the end of 2 years and 3 months,
and the last at the end of 5 years and 6 months, if money is worth
15% compounded quarterly.
5. Find the monthly payment for 36 periods to discharge an obligation
of P88,000, if money is worth 12%, m=12 and the first payment is
due at the end of 1 year and 3 months.