Ordinary Annuity

(Chapter 3 – Lesson 10)

Definition of Terms
Annuity is a sequence of equal periodic payments.
Annuity Certain refers to payment extended over a fixed term of years.
Contingent Annuity refers to payment over a period of time whose length cannot be
foretold accurately.
Perpetuity is an annuity in which the payment continues indefinitely.
Ordinary Annuity is a sequence of equal payments which occur at the end of
corresponding payment intervals.

Useful Formulas
Present Worth
1−( 1+i )−n ( 1+i )n−1
P= A =A n
i i ( 1+i )
Future Worth
n( 1+i )n−1
F=P ( 1+i ) =A
i
Where:
P = Present worth of the annuity
F = Future Worth of the annuity
A = Amount of series equal payments
i = interest rate per interest period
n = number of interest periods

Example Solve 1
Problem
What is the present worth and accumulated amount of a 10-year annuity paying
₱10,000 at the end of each year with interest at 15% compounded annually?
Given
A = ₱10,000
Nominal interest rate = 15% compounded annually
Number of year = 10 years
Required
Present Worth
Future Worth
Solution
0.15
i= =0.15
1
1−( 1+i )−n 1−( 1+0.15 )−10
P= A =( ₱ 10,000 ) =₱ 50,187.69
i 0.15
( 1+i )n−1 ( 1+ 0.15 )10 −1
P= A n
=( ₱ 10,000 ) 10
=₱ 50,187.69
i ( 1+ i ) 0.15 ( 1+0.15 )
n 10
F=P ( 1+i ) =( ₱ 50,187.69 )( 1+0.15 ) =₱ 203,037.18
(1+i )n−1 ( 1+0.15 )10 −1
F= A =( ₱ 10,000 ) =₱ 203,037.18
i 0.15
Example Solve 2
Problem
What is the present worth and future worth of ₱5,000 annuity deposited at the end of
every three months for 5 years if the interest rate is 12% compounded semi-annually?
Given
A = ₱5,000
Nominal interest rate = 12% compounded semi-annually
Number of year = 5 years
Required
Present Worth
Future Worth
Solution
0.12
i= =0.06
2
n=5 years∗2 compounding period / year =10
Since ₱5,000 is deposited every three months but the compounding happens every
6 months, the value of A for computational purposes will be the total payment every
compounding period, which is ₱10,000.
1−( 1+0.06 )−10
P= ( ₱ 10,000 ) = ₱ 73,600.87
0.06
n 10
F=P ( 1+i ) =( ₱ 73,600.87 ) ( 1+ 0.06 ) =₱ 131,807.95

Example Solve 3
Problem
A chemical engineer wishes to set up a special fund by making uniform semi-annual
end-of-period deposits for 20 years. The fund is to provide ₱100,000 at the end of each
of the last 5 years of the 20-year period. If the interest is 8% compounded semi-annually,
what is the required semi-annual equal deposit to be made?
Given
Nominal interest rate = 8% compounded semi-annually
Number of year = 20 years
Annual cash inflow for the last 5 years of the term = ₱100,000

Required
Equal semi-annual deposit to be made

Solution
The problem wants to know how much will be deposited for 20 years in order to have a
cash inflow of ₱100,000 yearly for the last 5 years. Hence, we will be starting our
computation on the future worth of the projected cash inflow. And that future worth of
cash inflow for 5 years should be equal to the future worth of the cash outflow for 20
years.
Step 1: Future worth of the ₱100,000 yearly for 5 years
Solve for effective interest rate for withdrawals
0.08 2
i= ( )
2
=8.16 % (8 % compounded semi annually)
Solve for future worth of the cash inflow
 (1+0.0816 )5−1
F=( ₱ 100,000 ) =₱ 588,534.66
0.0816
Step 2: Semi-annual deposits to have a future worth of ₱588,534.66
Solve for interest rate per interest period for deposits
0.08
i= =0.04
2
Number of compounding periods
n=2 compounding p er year∗20 years=40
Solve for semi-annual deposit
(1+i )n−1
F= A
i
i 0.04
A=F n
=( ₱ 588,534.66 ) =₱ 6,193.44
(1+i ) −1 ( 1+0.04 )40−1

Annuity Due
(Chapter 3 – Lesson 11a)

Definition of Terms
Annuity Due is an annuity in which first payment occurs immediately on a day to be
called present.

Useful Formulas
Present Worth
( 1+i )n−1−1
P= A+ A n−1
i ( 1+i )
Future Worth
(1+i )n+ 1−1
F= A −A
i

Example Solve 1
Problem
What is the present worth and accumulated amount of a 10-year annuity due paying
₱10,000 at the start of each year with interest at 15% compounded annually?
Given
A = ₱10,000
Nominal interest rate = 15% compounded annually
Number of year = 10 years
Required
Present Worth
Future Worth
Solution
0.15
i= =0.15
1
(1+ 0.15 )10−1 −1
P= ₱ 10,000+ ( ₱ 10,000 ) 10−1
=₱ 57,715.84
0.15 ( 1+0.15 )
 (1+ 0.15 )10+1−1
F=( ₱ 10,000 ) −₱ 10,000=₱ 233,492.76
0.15

Note: Solving annuity due only differs on formula with the ordinary/simple annuity.

Deferred Annuity
(Chapter 3 – Lesson 11b)

Definition of Terms
Deferred Annuity is an annuity in which the term does not begin until the expiration of a
specified time. In other words, this is a type of annuity whose first payment is made after
several periods after the beginning of the annuity.

Useful Formulas
For calculations before the annuity, use compound interest formulas
For calculations on the actual annuity, use ordinary annuity formulas.

Example Solve 1
Problem
Solve for the present worth and future worth of a 10-year deferred annuity starting 5
years from now. Assume a 10% annual interest rate compounded annually for each
₱10,000 payment at the end of each year.
Given
A = ₱10,000
Nominal interest rate = 10% compounded annually
Number annuity year = 10 years
Number of deferred year = 5 years
Required
Present Worth
Future Worth
Solution
Present Worth
Method 1: (separate analysis of deferred years and actual annuity years)
Step 1: Solve for the present worth of the annuity. Consider only the 10-year
annuity. Assume an ordinary annuity.
1−( 1+0.1 )−10
P5=( ₱ 10,000 ) =₱ 61,445.67
0.1
Step 2: Solve for the present worth of the deferred annuity. Consider only the 5
deferred years. Assume a compound interest computation. Set the ₱61,445.67
as the future worth of the compound interest.
₱ 61,445.67
P= =₱ 38,152.93
(1+0.1)5
Method 2: (pseudo annuity on deferred years)
Step 1: Solve for the present worth of the annuity assuming that the whole 15-
year duration is the actual annuity years.
1−( 1+0.1 )−15
P−15=( ₱ 10,000 ) =₱ 76,060.80
0.1
 Step 2: Solve for the present worth of the 5-year deferred years as an ordinary
annuity.
1− (1+ 0.1 )−5
P−5 =( ₱ 10,000 ) =₱ 37,907.87
0.1
Step 3: Solve for the actual present worth of the deferred annuity by subtracting
P-15 and P-5.
P0= ₱ 76,060.80−₱ 37,907.87=₱ 38,152.93

Future Worth
The future worth of deferred annuity is the same as the future worth of the
ordinary annuity during the actual annuity (which has a length of 10 years).
Hence, we can solve the future worth in 3 ways – 1) using simple annuity
future worth formula; 2) using the future worth after 10 years of compound
interest starting at P5; and 3) using the future worth after 15 years of compound
interest starting at P0.
Method 1
(1+i )n−1 ( 1+0.1 )10−1
F= A = ₱ 10,000 =₱ 159,371.25
i 0.1
Method 2
F=P5 (1+ 0.1 )10 =₱ 61,445.67 ( 1+ 0.1 )10=₱ 159,371.25
Method 3
F=P0 ( 1+ 0.1 )15 =₱ 38,152.93 (1+ 0.1 )15=₱ 159,371.25

Example Solve 2
Problem
A borrower agreed to discharge his debt by paying sequence of 12 equal quarterly
payments. The first payment is due at the end of the second year. Determine the amount
of quarterly payment if the obligation is worth ₱60,000 at 8% compounded quarterly.
Determine also the Future worth of his obligation.
Given
Present Worth = ₱60,000
Nominal interest rate = 5% compounded quarterly
Number annuity periods = 12 quarters
Number of deferred year = 2 years
Number of deferred periods = 8
Required
Amount of Annuity payments (A)
Future Worth (F)
Solution
Solve for i
0.08
i= =0.02
4
Solve for the future worth at the end of the second year
F=P ( 1+i )n =₱ 60,000 ( 1+ 0.02 )8=₱ 70,299.56
Solve for the amount of annuity payments for 12 quarters
1−( 1+i )−n
P= A
i
 i 0.02
A=P −n
=₱ 70,299.56 =₱ 6,647.50
1−( 1+i ) 1−( 1+0.02 )−12
Solve for the future worth of the obligation
n 8+12
F=P ( 1+i ) =₱ 60,000 ( 1+ 0.02 ) =₱ 89.156 .84
F=P ( 1+i )n =₱ 70,299.56 ( 1+ 0.02 )12= ₱ 89.156 .84
(1+i )n−1 ( 1+0.02 )12−1
F= A = ₱ 6,647.50 =₱ 89.156 .84
i 0.02