LESSON 6

ANNUITY DUE, DEFERRED ANNUITY AND PERPETUITY

Annuity Due – annuity whose 1st payment occurs immediately. The 1st payment occurs at the beginning
of each term and ends one payment interval after the last payment.

Deferred Annuity - annuity whose term does not begin until the expiration of a specified time.

Perpetuity - an annuity where the payment period extends forever, which means that the periodic
payments continue indefinitely.

Formula:
A
P= A = Annuity i = rate of interest
i

Example 1
If money is worth 4% compounded semiannually, find the present amount of an annuity due paying P
5,000 semiannually for a term of 3.5 years.
Solution:

A = 5,000 i = 4% compounded semiannually

n = 3.5 x 2 = 7
 4% 6
P=
(
5,000[ 1+
2
−1] )
+5,000=¿ P 33,007.15
4% 4% 6
2
1+ (
2 )
Note: All the A’s are added from 1 to 6 using the Ordinary Annuity Formula then A is added.

Example 2
A man agrees to make equal payments at the beginning of each 6 months for 10 years to discharge a
debt of P 50,000 due now. If money is worth 8% compounded semiannually, find the semiannual
payment.
Solution:
1−( 1+i )−n
P= A Ordinary Annuity Formula
i

8%
50,000= A + A
( [ 1+
2 )
¿ ¿19−1]
¿ ¿ A+ A 1−1.04
−19

19
8% 8% 0.04
2
1+ ( 2 )
50,000 = 14.1339394 A
A= P 3,537.58

Example 3
To accumulate a fund of P 80,000 at the end of 10 years, a man will make equal annual deposits in
the fund at the beginning of each year. How much should he deposit if the fund is invested at 5%
compounded annually?
Solution:

Use the sum of ordinary annuities ( Future Worth )

A [ ( 1+i ) ¿¿ n−1]
F= ¿
i
A [( 1+5 % ) ¿¿ 11−1]
80,000= −A¿
5%

80,000 = 13.20678A
A = 6,057.49

Example 4 Deferred Annuity

The present value of an annuity of R pesos payable annually for 8 years, with the 1 st payment at the end
of 10 years is P 187,481.25. Find the value of R if money if money is worth 5%.
Solution:

Transfer P to year 9.
P9 = 187,481.25(1+5%)9 = 290,844.9531
 A [ ( 1+ i )n −1] 1−( 1+ i )−n
Then Use: P = n ¿ A
i ( 1+i ) i
290,844.9531 = R ¿ ¿
R = 45,000.06

Example 5
A parent on the day that child is born wishes to determine what lump sum would have to be paid into an
account bearing interest of 5% compounded annually, in order to withdraw P 20,000 each on the child’s
18th, 19th , 20th and 21th birthdays?
Solution:

20,000[ ( 1+5 % ) 4−1] 1−1.05− 4

P ( 1+ 5 % )17= 4 =20,000
5 % ( 1+5 % ) 0.05
P = P 30,941.73

Example 6
Find the present value of a perpetuity of P 15,000 payable semiannually if money is worth 8%
compounded quarterly.
Solution:
Convert 8% compounded quarterly to x% compounded semiannually.
8% 4 2
x%
( 1+
4 ) (
= 1+
2 )
x = 8.08% compounded semiannually
A
P=
i
15,000
P= =P 371,287
8.08 %
2
Example 6
If money is worth 8%,determine the present value of a perpetuity of P 1,000 payable annually with the 1 st
payment due at the end of 5 years.
Solution:

A 1,000
P ( 1.08 )4= =
i 8%
P = 9,187.87

PROBLEM SET 6
Name: __________________________________ Score: ________
Subject and Section: ____________________________

1. A man bought a machine costing P 25,000 payable in 10 semiannual payments payable at the
beginning of each period. interest = 26% compounded semiannually. Determine the amount of
installment. Ans. P 4,077.2

2. A machine cost P 60,000 if paid in cash and if paid in installment will require P 20,000 down and 10
quarterly installments. interest = 14% compounded quarterly. What is the quarterly installment?
Ans. P 5,439.18
3. A man invest P 50,000 now for the college education of his 2 year old son. Money is 14% effective.
How much will the son get each year starting from his 18th to 22nd birthday?
Ans. P 103,598.20

4. A person buys a property for P 100,000 downpayment and 10 deferrred semiannnual payments of P
8,000 each starting three years from now. What is the present value of the investment?
interest = 12% compounded semiannually. Ans. P 143,999.08

5. A house cost P 400,000.00. Mr X will pay P 90,000 cash, 60,000 at the end of 2 years and a
sequence of 6 equal annual payments starting with the 1st at the end of 4 years to pay the house.
Interest is 7% compounded annually. Find the annual payment for the 6 years. Ans. P 66,204.14.

6. Compute the present and future worth of payments of

a. 5,000 at the beginning of each month for 12 months.
b. Future worth of 12 payments of 5,000 each at the beginning of each month ( at the end of the 12
months )
Interest = 1% per month.
Ans. P 56,838.14 and 64,046.64

7. Robert wants to deposit $300 into a fund at the beginning of each month. If he can earn 10%
compounded interest monthly, how much amount will be there in the fund at the end of 6 years?
Ans.$ 29,678.67
8. The monthly rent on an apartment is $950 per month payable at the beginning of each month. If the
current interest is 12% compounded monthly, what single payment 12 months in advance would be equal
to a year’s rent?
Ans. $ 10,799.24

9. Find the present worth of a perpetuity of 1,000 annual payments with interest of 6% . Ans.
16,666.67

10. Find the present value of a perpetuity of 1,000 every quarter with interest of 6% effective. Ans.
68,148.46

11. Find the present value of a perpetuity of 1000 monthly payments if interest if 8% compounded
annually.
Ans. P 155,423.58

12. Find the present value of a perpetuity that starts monthly payment of 1000 after 6 months with
interest of 12% compounded quarterly. Ans. P 96,138.59

13. Find the present and future worth of the following.

1. end of monthly payments of 10,000 for 10 years , i = 1%/month

starting after 1 year. Ans. 654,440.96, P2,130,204.89

2. beginning of monthly payments of 5,000 for 10 years , i= 1% per month. Ans. 343,552.12 ,
1,133,854.90