Ge three
pts
annuity certain which j
ity uncertain (cont
includes: annuity, annuit
ngent annuity)
ity due, deferred annuity;
OVERVIEW OF THE CONCEPTS
Annuities is q Sequence of periodic Payments
times usually monthly,
loan or create a fund. Some
» and periodic
+ @nnuity certain and
imple annuity. Simple
and deferred annuity.
DEFINITION OF TERMS
Payment interval
The payment interval is the time between consecutive Payments of
annuity,
Periodic Payment (R)
The amount paid during each installment payment period is called the
Periodic payment,
Term of annuity (1)
The time from the beginning of the first payment interval to the end of
the last Payment interval is called the term of annuity. The total number of
Conversion Periods in the term of annuity is given by n=tm
3.1 Two groups of annuities
Annuity certain is an annuity in which payments begin and end on a
Aefinite or fixed date.
if i i ity whose payment
Annuity uncertain (contingent annuity) is an annuity p
*nning and termination is indefinite for it is dependent on ee
ingn®t be determined accurately, Example of this group of annuity is
“surance premiums.ayment interval is the same ag
Simple annuity is an annuity whose payment in the
conversion period m
3.2 Classification of simple annuity
/ eriodic payments
Ordinary annuity (0,)is an annuity whose p Pa at
i the
scheduled at the end of each payment interval. The following is the Eraphicg
illustration of these payments denoted by dots.
(erm of annuity with 9 payment intervals
° .
first payment
interval
Figure 1
first payment last payment
occurring at the occurring at the
end of the first end of the last
payment interval payment interval
Annuity due (A,) is an annuity whose periodic payment is scheduled at
the beginning of each payment interval. The following is the graphical
illustration of these payments denoted by dots.
term of annuity with 9 payment intervals
first payment
interval
| first " ee
rst payment I,
occurring at the coete ik
occurring at the
start of the first start of the last
Payment interval
Payment interval
Deferred annuity (D,) is an annuity whose first payment is to start @!
some later time. The following is a gray
phical illustration of this paymet
denoted by a dot. This payment is made one period after the last date ote
deferment period 4)period of deferment
(for 4, Periods)
Payments of R for n periods
Figure 3
Notations
The following notations will be used throughout this unit.
5 = sum or amount of an ordinary annuity (0)
2) A= present value of an ordinary annuity (0)
3) R = periodic payment
4) ' = term of an annuity
5) S” = sum ofan annuity due (Ay)
6) A” = present value of an annuity due (A
7) r = rate of an annuity
8) m= number of conversion period per year
9) = total number of conversion periods for the whole term (tm)
\)
10) i = periodic rate 6
m
11) S* = sum of deferred annuity (D,)
12) A® = present value of deferred annuity (D_)
3.3 The amount and present value of an ordinary annuity
The amount of an annuity, denoted by S, is the sum of the values of all
the periodic payments at the end of the term. To find the amount of an
ordinary annuity, the following formula will be used.
S=R
i
seit (3.1)
f present
The present value of an annuity, denoted by A, is the sum of pt
Yalues of all the payments at the beginning of the term. To find the present
of an ordinary annuity, the following formula will be used.jeg ics" | 3.
To find the cash equivalent of an item bought with a down ee
and the balance is paid on equal installments for over a period of time, the
following formula will be used.
CE=DP+A (3.3)
Note: Problems that involve expenses and cash equivalent are finding the
present value problems and those that involve income are finding
the amount of annuity problems.
Mlustrative Examples:
Example 1:
Determine the amount and present value of an ordinary annuity of P50
each quarter payable for 6 years and 9 months, if money is worth 14%
compounded quarterly,
Solution:
Given: R=P500 m=4 r=14%=0,14
._ 0.14 it 3
= =0.085 abe edd
i i ib Saye ren
Required: S$ and A
wn a
Formulas: soft Ase oti”
i ;
i
Computations:
sso (40039)77 -1
30 Tas | 548.75906004 = poyg7953
Az sop) Lll+0035)~27
= 500) UF 0.035)"
0085
Thus, th
21,869.53 an
l= 500(17.28536451) = P8,642.68
ne amount and Present value of
1d P8642,68, Tespectively, : ae\ computer set is offer
S CTE r
ctuonthalar the a fe Sale for P15000 down payment and P2500
sd at 11% compounded Ho 2 Yeats and 6 months. Interest Ist be
set? quarterly, what is the cash equivalent of the
golui0""
Given: DP = P15,000
m=4 R= P2500
= 0.0275 n=d(2.5)=10
Required: Cash equivalent (CE)
Formula: CE = DP + {rez
1=(1+0.,0275)7 19
0.0275
Computations:
CE =15,000+ 2,5 5,000 + 2,500(8.640076 163)
CE = P36,600.19
.Thus, the cash equivalent of the computer set is P36,600.19.
Example 3:
Mr. Rex deposits P1,250 every end of 6 months in an account paying
ng interest compounded semiannually. What amount is in the account at the
end of 5 years?
Solution:
0.065 i “ihe
Given: R= PI250 fen5 5 OS m=2 n=5(2)=10
Required: 5
(+i" =I
Formula: 5 =) 7 Ge
Computation: i
(1 40.0325) 1]. y5q(11 3967781) = P14.495.93
$= 1250 99325
will be P14.495 93 in the account after 5 years.
Thus, there4 rhe periodic payment ofan ordinary annuity
Let S be the amount 4
yrmulas to be used in ii A be the present value of an ordinary annuity.
he form ‘ermining the periodic payment of an annuity at a
gpoolied rate F compounded m over g specified period of time 1 are as follows:
Sw)
R=——
ueo"=1 ea
i A(i)
-(+i" G2)
What must be deposited every 6 months in a fund paying 15%
compounded semiannually in order to have P50,000in 9 years?
Solution:
Given; S=Psnoto i=“Beoms ma n=9(2)=18
Required: R
Formula: pao
(+i"-1
Computation:
p= SCOOT A= Plaats
a+oo7'8-1 26
Thus, P1,401.45 must be deposited every 6 months.
Sample 5:
id at the end of every month for 8 years and 6
pe a of P20,200 and interest are paid at 12%
“mpounded monthly?
Solution:
0.12
j=——=0.01 m=12 =12(8.5)=102
Given: A=PI020 f= = 001 m ne
Required:Mo
1-4)"
Computation:
annoy __ psi693
1-(veonn 2 063757889
Formula: R=
Thus, P316.83will be paid at the end of every month for 8.5 years.
Example 6;
A water purifier costs P5000. It is purchased with a down payment
P1000 and 5 semiannual payments. If money is worth 18% compounde
semiannually, find the semiannual payment.
Solution:
Given: ‘A=5,000~1,000= P4,000 m=2
ja ogy n=S
2
Required: R
Formula: pee
1-a+i"
Computation:
a aaa = PL028.37
“y-q140.09)7S 03506813
Thus, the remalning balance for the purchase ofthe water purifier wil *
paid by P,02837 semiannually.agus abn mos maa AIMS
a ee
mene ~ Ai
re FE —
noe ee _ 7
a nO _
7 ae EE
wen ernie
a
—
4
aieo
PG meaner. iat teeution
given:
Required:
Formul r
A=30,000-8,000= P22,000 R=P500 m=12
t=5 nz 4nd 122600
b=6(60+1)= cot ML
ca (22,000) 41%
r
bee ' ‘
2a