MODULE 2: Money-Time Relationships

Module Rationale:

This module contains the money-time relationships which includes simple interest,
compound interest, continuous compounding, annuities, ordinary annuities and annuity due.
The time value of money draws from the idea that people would rather have money today than
in the future.

Module Outcomes:
At the end of the module, you are expected to:
1. Know the basic definition of different money-time relationships;
2. Formulate time value of money considers the payment now, the future value,
the interest rate and the time frame;
3. Analyze the different formulas needed for computing money-time
relationships;
4. Solve problems involving simple interest, compound interest, compounding
and annuities;

LESSON 1: Simple and Compound Interest

Estimated Time: 3 hour

Lesson Outcomes:

At the end of the lesson, you are expected to:

1. Know and use of simple and compound interest terminology
2. Understand when interest is paid and earned
3. Formulate the use of formula for calculating the total amount of a loan or total
value of an investment at the end of a specific term
4. Understand how to algebraically manipulated the interest formulas to solve
different variables
Lesson Contents:

The time value of money (TVM) is 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
important concept in financial management. It can be used to compare investment alternatives
and to solve problems involving loans, leases, and savings.
From the viewpoint of the borrower, interest is the amount of money paid for the use of
borrowed capital. For the lender, interest is the income produced by the money which he has
lent.
The charging of interest is justified, from the standpoint of the lender, because he has to
forego the use of his money during the time it is borrowed and to compensate him also for the
risk which he has to take in lending his money. From the borrower’s view point, it is usually
advantageous to borrow money if in so doing he will be able to earn more than the interest
which he has to pay.
Simple Interest (denoted as I) is defined as the interest on a loan or principal that is
based only on the original amount of the loan or principal. The interest to be paid is directly
proportional to the length of time the amount or principal is borrowed.
Principal is the amount of money borrowed and on which interest is charged.
Rate of Interest is the amount earned by one unit of principal during a unit of time.
This means that the interest charges grow in linear function over period of time. This is
usually used for short-term loans where the period of the loan is measured in days rather than
years. It can be calculated using the following formula:
I =Pin
where:
I= total interest earned by the principal
P= amount of principal
i= rate of interest per period expressed in decimal form
n=number of interest periods

The total amount F to be repaid is equal to the sum of the principal and the total interest
and is given by the formula:

F=P+ I F=P+ Pin F=P(1+¿)

where:
 F= future amount; P= principal; i= interest per period; n= number of periods.

Types of Simple Interest

1. Ordinary Simple Interest- is based on the one banker’s year. A banker year is
composed of 12 months of 30 days each which is equivalent to a total of 360 days in
a year. The value of n that is used in the preceding formulas may be calculated as,

1 banker’s year= 12 months, each consisting of 30 days= 360 days

d
n= where, d= number of days
360

2. Exact Simple Interest- is based on the exact number of days in a given year. An
ordinary or normal year has 365 days while leap year (which occurs once every 4
years) has 366 days. The leap years are those which are exactly divisible by 4, but
excluding the century years such as the years 1900, 2000, etc.
d
For normal years: n= where, d= number of days
365
d
For leap years: n=
366

Compound Interest, the interest earned by the principal is net paid at the end of each
interest period, but is considered as added to the principal and therefore will also earn interest
for the succeeding periods. The interest earned by the principal when invested at compound
interest is much more than that earned by the same principal when invested at simple interest
for the same number of periods.
Using the same nomenclature as that for simple interest, the total amount due after n
periods for compound interest is given by the formula:

F=P ¿
which is derived in accordance with simple interest formula. The factor ¿ is called the “Single

F
Payment Compound Amount Factor” and is designated by SPCAF = ( ,i % , n ¿. Thus, and
P
Formula is written F=P ¿
 Table 2.1. Derivation of Formula
Interest Principal at Interest earned Compound amount at the end of the
Period beginning of the during period period
period
1 P Pi P+ Pi=P(1+i)
2 P(1+i) P ( 1+ i ) i P ( 1+ i ) + P ( 1+i ) i=P ¿
3 P¿ P¿ P¿
…… …… …… ……
n P¿ P¿ P¿

In order to apply the formulas of simple and compound interest and type of interest, you
must understand and analyze some examples.

The mathematical formula for compound interest depends on several factors. These
factors include the amount of money deposited called the principal, the annual interest rate (in
decimal form), the number times the money is compounded per year and the number of years
the money is left in the bank. These factors lead to the formula

i
FV =P(1+ )n x t
n
where:
FV = Future value of the deposit
P = Principal or amount of money deposited
i=¿ annual interest rate (in decimal form)
n= number times the money is compounded per year
t= time in years

When Compounding Occurs This Often Number of Periods, n during a 1 year time span
Annually 1
Semi-annually 2
Quarterly 4
Monthly 12

Example for Simple Interest

Example 1: Determine the ordinary simple interest on ₱10,000 for 9 months and 10 days if the
interest is 12%.

Solution: Based on a banker’s year,

 9 months and 10 days = 9(30)+10= 280 days
Ordinary simple interest= I =Pin
d 280
P=10,000 ; i=12 % , n= = =0.778
360 360
I =Pin=( 10,000 )( 0.12 ) ( 0.778 )= ₱ 933.6

Example 2: Determine the ordinary and exact simple interests on ₱5,000 for the period from
January 15 to June 20, 1993, if the rate of simple interest is 14%.

Solution: First determine the number of days in the given period.

January 15-31 = 16 days (excluding January 15)
February = 28
March = 31
April = 30
May = 31
June 1-20 = 20 (including June 20)
TOTAL 156 days
Ordinary simple interest is based on a banker’s year of 360 days., while exact simple interest is
based on the actual number of days in the year, 366 days for a leap year and 365 days
otherwise. Thus, noting that 1993 is not a leap year, we have

Ordinary simple interest: I =Pin=( ₱ 5,000 ) ( 0.14 ) ( 156

360 )
=¿₱303.33

156
I =Pin=( ₱ 5,000 ) ( 0.14 ) (
365 )
Exact simple interest: =¿₱299.18

Example 3: Determine the exact and ordinary simple interests on ₱1,200 for the period from
January 16 to November 26, 1992, if the rate of interest is 24%.

Solution:
The number of days for the given period is computed as follows noting that the year
1992 is a leap year.

January 16-31 = 15 days (excluding January 16)

February = 28
March = 31
April = 30
May = 31
 June = 30
July = 31
August = 31
September = 30
October = 31
November = 26 days (including November 26)
TOTAL = 315 days

Note: that the first day, January 16 is excluded, but the last day of November 26, is included.
January 16 is the 16th day of the year and November 26 is the 331st day. Thus, the number of
days is 331−16=315.

Exact simple interest = I =Pin=( ₱ 1,200 ) ( 0.24 ) ( 315

366 )
=¿₱247.87

315
I =Pin=( ₱ 1,200 ) ( 0.24 ) (
360 )
Ordinary simple interest= =¿₱252.00

Example 4: A man borrows ₱10,000 from a loan firm. The rate of simple interest is 15% but
the interest is to be deducted from the loan at the time the money is borrowed. At the end of one
year he has to pay back ₱10,000. What is the actual rate of interest?

Solution:
P ¿ ₱ 10,000−0.15 ( ₱ 10,000 )=₱ 8,500
F ¿ ₱ 10,000
n¿1
F=P(1+¿)
₱ 10,000=₱ 8,500 ( 1+i )
i=0.1765=17.65 %

Example 5: A man borrows ₱6,400 from a loan association. In repaying this debt he has to
pay ₱400 at the end of every 3 months on the principal and a simple interest of 16% on the
principal outstanding at that time. Determine the total amount he has paid after paying all his
debt.
Solution:
 The total amount paid on the principal in one year will be 4(₱400) = ₱1,600. Thus, he will
be able to pay the debt back after ₱6,400/₱1,600 = 4 years. He will then have made 16
payments. The interest rate for each period is 16%/4 = 4%.

Interest paid on first payment = 0.04(₱6,400) = ₱256

Interest paid on second payment = 0.04(₱6,000) = ₱240
Interest paid on third payment = 0.04(₱5,600) = ₱224
. . . . . . . . .. . . .
Interest paid on 16th payment = 0.04(₱400) = ₱16
Total interest paid = ₱256 + ₱240 + ₱224 +. . . . . . + ₱16

This
is
an
arithmetic progression whose
sum
is
This is an arithmetic progression whose sum is

16
Sn = (₱256 + ₱16) = ₱2,176
2
Total amount paid = ₱6,400 + ₱2,176 = ₱8,576

Example of Compound Interest

Example 6: If the sum of ₱12,000 is deposited in an account in an earning interest at the rate
of 9% compounded quarterly, what will it become at the end of 8 years?
Solution:
9%
P= ₱ 12,000i= =2.25 %=0.0225 ; n=8 ( 4 )=32.
4
 F=P ( FP ,i % , n )=P(1+i)
n

F=¿ ₱ 12,000(1+ 0.0225)32 = ₱ 12,000 ( 1+0.0225 )

F=₱ 24,457.24

Example 7: At a certain interest rate compounded quarterly, ₱1,000 will amount to be ₱4,500
in 15 years. What is the amount at the end of 10 years?
Solution:
For 15 years,
P= ₱ 1,000; F=₱ 4,500 ; n=15 ( 4 ) =60 periods

F=P ( FP ,i % , n )=P(1+i)n

₱ 4,5000=₱ 1,000 (1+ i)60 (1+i)60¿ 4.5

i=0.02538=2.538 %
For 10 years,
n=10 ( 4 )=40 periods
F=P(1+i)n¿ ₱ 1,000(1.02538)40¿ ₱ 2,725.17

Example 8: You deposit ₱600.00 into a savings account. How much money do you have
after 3 years if the account has a 4% interest rate, and the interest is compounded annually?

Solution:

Year # Principal (P) Interest Future Amount (Year End Amount)

Rate (i) F=P(1+i)n
The money
1 in 3 years is
₱600.00 0.04 F=600(1+0.04 )1¿ ₱ 624.00
2 ₱600.00 0.04 F=600(1+0.04 )2¿ ₱ 648.96
3 ₱600.00 0.04 F=600(1+0.04 )3¿ ₱ 674.92
₱ 674.92 and the interest is ₱ 674.92−₱ 600.00= ₱ 74.92 over 3 years.

Example 9: Mr. Bacani borrowed money from the bank. He received from the bank
₱ 1,842.00 and promised to repay ₱ 2,000.00 at the end of 10 months. Determine the rate of
interest.
 Solution:
10 months
F=₱ 2,000.00 ; P= ₱ 1,842.00 ; n= =0.833
12 months
` F=P(1+i)n
₱ 2,000.00=₱ 1,842.00(1+i) 0.833
i=0.1038 x 100 %=10.38 %

Example 10: You borrow ₱ 3,500.00 for on year from a friend at an interest rate of 1.5% per
month instead of taking a loan from a bank at a rate of 18% per year. How much lesser you will
pay by borrowing the money from the bank?

Solution:
F1 P= ₱ 3,500.00 ; i=0.015 ; n=12 months
F=P(1+i)n
F=₱ 3,500.00(1+ 0.015)12 ¿ ₱ 4,184.66

F2 P= ₱ 3,500.00 ; i=0.18 ; n=1

F=P(1+i)n
F=₱ 3,500.00(1+ 0.18)1 ¿ ₱ 4,130.00
FT¿ F1 - F2¿ ₱ 4,184.66−₱ 4,130.00= ₱ 54.66

Try this!
1. Find the interest on a car loan of ₱ 5,000.00 at a rate of 16% for a period of 8 months.
Ans: I =₱ 533.33
2. Find the amount due on a loan of ₱ 600.00 at 15.75% interest after 21 months.
Ans: F=₱ 765.38
3. What is the annual interest rate earned by a 33-day T bill with a maturity value of
₱ 1,000.00 that sells for ₱ 996.16? (Use 360 days of the year)
Ans: i=4.2%
4. If you borrow ₱ 3,000 at 14% simple interest for 10 months, how much will you owe in 10
months? How much interest will you pay?
 Ans: F=₱ 3,346.12∧I = ₱ 34 6.12
5. If you deposit ₱ 4,000into an account paying 6% annual interest compounded quarterly,
how much money will be in the account after 5 years?
Ans: FV =₱ 5,387.42
6. If you deposit ₱ 6,500 in an account paying 8% annual interest compounded monthly,
how much money will be in the account after 7 years?
Ans: FV =₱ 11,358.24
7. How much money would you need to deposit today at 9% annual interest compounded
monthly to have ₱ 12,000 in the account after 6 years?
Ans: P= ₱ 7,007.08
8. If you deposit ₱ 5,000 into an account paying 6% annual interest compounded monthly,
how long until there is ₱ 8,000 in the account?
Ans: t=7.85

LESSON 2: Continuous Compounding and Rate of Interest

Estimated Time: 3 hour

Lesson Outcomes:

At the end of the lesson, you are expected to:

1. Understand interest rate statements
2. Use formula for effective and nominal rate of interest
3. Determine payment period (PP) and compounding period (CP) for
equivalence calculations
4. Formulate the continuous compounding at its uses

Lesson Contents:
The concept of continuous compounding is based on the assumption that cash
payments occur once per year but compounding is continuous throughout the year.
 The future worth, F:
F=Pe(NR)(n)
Where:
P=Pricipal Amount
e=2 . 71828 … … …
NR=Nominal Rate
n=number of years
e (NR)(n)¿ continuous compounding compound amount factor

The present worth, P:

P=F / e (NR)(n)

What is Continuously Compounded Return?

Continuously compounded return is what happens when the interest earned on an

investment is calculated and reinvested back into the account for an infinite number of periods.
The interest is calculated on the principal amount and the interest accumulated over the given
periods and reinvested back into the cash balance.
 Regular compounding is calculated over specific time intervals such as monthly,
quarterly, semi-annually and on annual basis. Continuous compounding is an extreme case of
this type of compounding since it calculates interest over an infinite number of periods. The
difference between the interest earned through the traditional compounding method and the
continuous compounding method may be significant.

Annual Compounding
Annual compounding means that the return on an investment is calculated every year,
and it is different from simple interest. The annual compounding method uses the following
formula:
Tota l Return=F=P ¿

The return on investment is obtained by deducting the principal amount from the total returns
obtain using the above formula.

Example: Assume that Company ABC invested ₱10,000.00 to purchase a financial instrument,
and the rate of return is 5% for two years. Therefore, the interest earned form ABC’s investment
for the two-year period is follows:

Solution:
P= ₱ 10,000; i=5 % ; n=2 years
F=P(1+i)n
F=₱ 10,000(1+ 0.05)2 ¿ ₱ 11,025.00

I =₱ 11,025−₱ 10,000=₱ 1,025.00

Therefore, Company ABC earned interest of ₱ 1,025.00 on its investment of ₱ 10,000
over two years.

Continuously Compounded Return

Unlike annual compounding, which involves a specific number of periods, the number of
periods used for continuous compounding is infinitely numerous. Instead of using the number of
years in the equation, continuous compounding uses exponential constant to represent the
infinite number of periods. The formula for the principal plus interest is as follows:

Total=Principal x e (interest x years)

Where:
e=exponential function=2. 71828 … … …

Using Company ABC example above, the return on investment can be calculated as
follows when using continuous compounding:
¿ ₱ 10,000 x e(0.05 x 2)
¿ ₱ 10,000 x 1.1052

¿ ₱ 11,051.71
Interest= ₱ 11,051.71− ₱ 10,000=₱ 1,051.71

The difference between the return on investment when using continuous compounding
versus annual compounding is ₱ 1,051.71− ₱ 1,025.00=₱ 26.71
Daily, Monthly, Quarterly and Semi-annual Compounding
Apart from the annual and continuous compounding methods, interest can also be
compounded at different time intervals such as daily, monthly, quarterly and semi-annually.

To illustrate compounding at different time intervals, we take an initial investment of

₱ 1,000 that pays an interest rate of 8%.

 Daily Compounding
The formula for daily compounding is as follows:
i 365
F=P(1+ )
365
0.08 (365)
F=₱ 1,000(1+ )
365
F=₱ 1,000(1+ 0.00022)(365)
F=₱ 1,083.60`
  Monthly Compounding
The formula for monthly interval is as follows:
i 12
F=P(1+ )
12
0.08 (12)
F=₱ 1,000(1+ )
12
F=₱ 1,000(1+ 0.00667)(12)
F=₱ 1,083.04 `

 Quarterly Compounding
The formula for quarterly interval is as follows:
i
F=P(1+ )4
4
0.08 (4)
F=₱ 1,000(1+ )
4
F=₱ 1,000(1+ 0.02)(4)
F=₱ 1,082.43`

 Semi-annual Compounding
The formula for semi-annual interval is as follows:
i
F=P(1+ )2
2
0.08 (2)
F=₱ 1,000(1+ )
2
F=₱ 1,000(1+ 0.04)(2)
F=₱ 1,081.60`

From the above calculations, we can conclude that all the intervals produce an almost
equal interest, but with a small variation.

Importance of Continuous Compounding

Continuous compounding offers various benefits over simple interest and regular
compounding. The benefits include:
 1. Reinvest gains perpetually
One of the benefits of continuous compounding is that the interest is reinvested
into the account over an infinite number of periods. It means that investors enjoy the
continuous growth of their portfolios, as compared to when they earn interest monthly,
quarterly or annually with regular compounding.

2. Interest amount will keep on growing

In continuous compounding, both the interest and the principal keep on growing,
which makes it easier to multiply the returns in the long term. Other forms of
compounding only earn interest on the principal and that interest is paid out as it is
earned. Reinvesting the interest allows the investor to earn at an exponential rate for an
infinite number of periods.

Rate of Interest
Rate of interest is the cost o borrowing money. It also refers to the amount earned by a
unit principal per unit time. The rate of interest have two types:

 Nominal Rate of Interest

 Effective Rate of Interest

Nominal Rate of Interests

Is defined as the basic annual rate of interest. Not include any consideration of
compounding.

Effective Rate of Interest

Is defined as the actual or the exact rate of interest earned on the principal during a one
year-period.

For Example: A principal is invested at 5% compounded quarterly.

 In this statement, the nominal rate is 5% while the effective is greater than 5% because
of the compounding which occurs four times a year. The following formula is used to determine
the effective rate of interest:

NR m
E=(1+ ) –1
m
Where:
m = number of interest periods per year
NR = nominal rate of interest
NR
=i , this is called the ER per compounding period
m

Substituting the values of m and i :

0.05 4
E=(1+ ) –1
4
E=0.0509 x 100 %
E=5.09 %

Example 1: What is the effective rate corresponding to 18% compounded daily? Take 1 year is
equal to 360 days.

Solution:
NR 0.18
i= = ; m=360 days ; Effective Rate ( E )=?
m 360
0.18 360
E=(1+ ) – 1=0.1972 x 100 %=19.72%
360
Example 2: What rate of interest compounded annually is the same as the rate of interest of 8%
compounded quarterly?

NR 0.08
i= = ; m=4 ; Effective Rate ( E )=?
m 4
0.08 4
E=(1+ ) – 1=0.0824 x 100 %=8.24 %
4

Example 3: Which of this gives the lowest effective rate of interest?

 a. 12.35% compounded annually
b. 11.90% compounded semi-annually
c. 12.20% compounded quarterly
d. 11.60% compounded monthly

a. 12.35% compounded annually

NR 0.1235
i= = ; m=1; Effective Rate ( E )=?
m 1
0.1235 1
E=(1+ ) – 1=0.1235 x 100 %=12.35 %
1
b. 11.90% compounded semi-annually

NR 0.1190
i= = ; m=2 ; Effective Rate ( E )=?
m 2
0.1190 2
E=(1+ ) – 1=0.1225 x 100 %=12.25 %
2
c. 12.20% compounded quarterly
NR 0.1220
i= = ; m=4 ; Effective Rate ( E )=?
m 4
0.1220 4
E=(1+ ) – 1=0.1277 x 100 %=12.77 %
4
d. 11.60% compounded monthly
NR 0.1160
i= = ; m=12 ; Effective Rate ( E )=?
m 12
0.1160 12
E=(1+ ) – 1=0.1277 x 100 %=12.24 %
12

Therefore, the lowest effective rate of interest is 11.60% compounded monthly that has
12.24 %.
Try this!
1. An amount of ₱ 1,000 becomes ₱ 1,608.44 after 4 years compounded bimonthly. Find
the nominal interest.
Answer: 12%
2. How long will it take money to double itself if invested at 5% compounded annually?
Answer: 14.2 years
 3. By the condition of a will, the sum of ₱ 20,000 is left to a girl to be held in trust fund by
her guardian until it amounts to ₱ 50,000 . When will the girl receive the money if the fund
is invested at 8% compounded quarterly?
Answer: 11.57 years
4. Mandarin Bank advertises 9.5% account that yields 9.84% annually. Find how often the
interest is compounded.
Answer: Quarterly
5. A loan for ₱ 50,000 is to be paid in 3 years at the amount of ₱ 65,000 . What is the
effective rate of money?
Answer: 9.14%

LESSON 3: Annuity

Estimated Time: 3 hour

Lesson Outcomes:

At the end of the lesson, you are expected to:

 1.  Differentiate the difference between a compound amount and an annuity.

2. Calculate and analyze the future value of types of annuity by using the
formula or the table for annuities.

3. Calculate the future value of types of an annuity due using the formula or the
table for annuities.

4. Define key terms

Lesson Contents:

Annuity is defined as a series of equal payments “A” occurring at equal interval of time.
When an annuity has a fixed time span, it is known as annuity certain.

In engineering economy, annuities are classified into four categories. These are: (1)
ordinary annuity, (2) deferred annuity, (3) annuity due, and (4) perpetuity. These four are
actually simple annuities described below.

1. Ordinary Annuity – this type of annuity where the payments are made at the end of
each period. The equal payments are made at the end of each compounding period
starting from the first compounding period.

From the cash flow diagram above, the future amount F is the sum of payments starting
from the end of the first period to the end of the nth period. Observe that the total number of
payments is n and the total number compounding periods is also n. Thus, the ordinary annuity,
the number of payments and the number of compounding periods are equal.
Future Amount of Ordinary Annuity, (F):

This factor is called equal-payment series compound-amount factor

F
( , i ,n).
A

Present Amount of Ordinary Annuity, (P):

P
This factor is called equal-payment series present worth factor ( , i ,n).
A

Periodic Payment of Annuity, (A):

The value of A if F is known:

A
This factor is called equal-payment series sinking fund factor ( , i ,n).
F

Periodic Payment of Annuity, (A):

The value of A if P is known:

A
This factor is called equal-payment series capital recovery factor ( , i ,n).
P
where:
 A= Annual payment
P= Present worth or amount
F= Future worth or amount
n= number of payment period
i= interest rate per period

Example 1: How much money must be deposited today in order to withdraw ₱2,000 annually
for 10 years if the interest rate is 9%?

Solution:
A=₱ 2,000 ; n=10 years ; i=9 % ; m=1 ( annually ) ; P=?

Substitute the given values:

(1+ 0.09 )10−1

P= ₱ 2,000
[
( 1+0.09 )10 ( 0.09 ))= ₱ 12,835.32

Example 2: What is the accumulated amount of the five-year annuity paying ₱ 6 ,000 at the end
of each year with interest at 15% compounded annually?

Solution:
A=₱ 6 , 000 ; n=5 years ; i=15 % ; m=1 ( annually ) ; F=?

Substitute the given values:

( 1+0.15 )5−1
F=₱ 6 , 000
[
( 0.15 ) )
¿ =₱ 40,454.29
 2. Deferred Annuity – In deferred annuity the first payment is deferred a certain number of
compounding periods after the first. In the diagram below, the first payment was made at
the end of the kth period and n number of payments was made. The n payments form an
ordinary annuity as indicated in the figure.

Future Amount of Deferred Annuity, (F):

Present Amount of Deferred Annuity, (P):

where:
A= Annual payment
P= Present worth or amount
F= Future worth or amount
n= number of payment period (equal to the number of deposits)
i= interest rate per period
k= number of periods before the first annuity
Example 3: What is the deferred present worth of a ₱ 500 annuity starting at the end of the
third year and continuing to the end of fourth year, if the annual interest rate is 10%?

Solution:
A=₱ 500 ; n=2 years ; k=2; i=10 % ; m=1 ( annually ) ; P=?

Substitute the given values:

( 1+0.10 )2
P= ₱ 500
[ ]
( 1+i )2+2
= ₱ 717.16

Alternate Solution: Using the Compound Interest Formula

F
P=
( 1+i )n
F ₱ 500
P1 P= = =₱ 375.66
( 1+i ) ( 1+0.10 )3
n

F ₱ 500
P2 P= = =₱ 341.51
( 1+i ) ( 1+0.10 )4
n

P=¿ P1 + P2¿ ₱ 375.66+ ₱ 341.5=₱ 717.16

3. Annuity Due – In annuity due, the equal payments are made at the beginning of each
compounding period from the first period. The diagram below shows the cash flow in
annuity due.
As an indicated in the figure above, F1 is the sum of ordinary annuity of n
payments. The future amount of F of an annuity due at the end of nth period is one
compounding period away from F1. In symbol, F = F1 ¿
Future Amount of Deferred Annuity, (F):

Present Amount of Deferred Annuity, (P):

Example 5: An 8-year annuity due has a future value of ₱1,000.  If the interest rate is 5 percent,
the amount of each annuity payment.

Solution:
F=₱ 1,0 00 ; n=8 years; i=5 % ; A=?

Substitute the given values:

(1+ 0.05 )8−1

₱ 1,000=A [ 0.05 ]
(1+0.05)

A=₱ 99.74
Example 6: What is the present value of an annuity due that makes 5 annual payments of $200
each if the discount rate is 12% by general formula constant rate and general floating formula?

Solution:
A=₱ 2 00 ; n=5 ( 1 ) annual payments ; i=12 % ; P=?

Substitute the given values:

( 1+0.12 )5−1
P= ₱ 200
[
( 1+0.12 )5 (0.12) ]
(1+ 0.12)

P= ₱ 807.47

4. Perpetuity – is an annuity where the payment period extends forever, which means that
the periodic payments continue indefinitely. There is no definite future in perpetuity, thus,
there is no formula for the future amount.

Present Amount of Deferred Annuity, (P):

From the present amount of ordinary annuity:
Example 6: A company is able to deliver a net income every year of ₱100. Assuming that this is
a perpetuity - a never ending income - the value of this cash flow (and the value of the
company) with a discount rate of 10% (i = 0.10) can be calculated to 

100
P= =₱ 1,000
0.10

Try this!
1. What ordinary annuity is required over 12 years to equate with a future amount of
₱ 20,000 ? Assume i=6% annually.
2. What is the present worth of a 3 year annuity paying ₱3,000 at the end of each year,
with interest at 8% compounded annually?
3. Today a businessman borrowed money to be paid in 10 equal payments for 10
quarters. If the interest rate is 10% compounded quarterly and the quarterly payment
is ₱2,000 pesos, how much did he borrow?
4. What annuity is required over 10 years to equate with a future amount of ₱20,000.
Assume i=8%
5. Junsel obtained a loan of ₱10,000 at the rate of 6% compounded annually in order to
repair his house. How much he pay monthly to amortize the loan within a period of
10 years?
References:
 Engineering Sciences and Allied Subjects (Excel Academic Council 2008)
 https://www.finra.org/investors/insights/your-guide-annuities-introduction#:~:text=At
%20its%20core%2C%20an%20annuity,or%20at%20some%20future
%20time.&text=Some%20annuity%20contracts%20provide%20a,a%20stream%20of
%20retirement%20income.
 https://mathalino.com/reviewer/engineering-economy/types-annuities