i he term of an Annuity
qhis section will show how to determine the term of the annuity. The
et of payment periods (n)of the given annuity problem will be, computed
sanding to the formula given below. Using the definition that n=s(m), the
f of the annuity t can be computed as re4,
m
49 d a+i"-1
ik, S, rand m are given, then from the formula 5 =k) —~——~ we
i
ancompute for nusing the following formula:
(3.8)
log(1 +i)
if . -(+i)"
eR, A, rand m are given, then from the formula 4= | ——~—~ |»
i
wecan compute for nusing the following formula:
log 1-—*
n R (3.9)
—log(!+i)
There will be problems where the number of equal payments will not be
‘ulficient to discharge @ debt or complete a payment. In this case, a concluding
bayment, which is less than the regular payment, can be derived using the
lilowing steps.
a) Find n using the appropriate formula. If nis a whole number, then
solve the problem as required. If nis not a whole number, then do the
following:
b) Find the amount of the regular payments one period after the last
regular payment using the formula.
n
ah
5, 4 Ut 11, where mis
R- j ' is equal to the whole number greater
than n+c) Accumulate the present value of the annuity using the formula
n
F,=PUti)!
d) Get the difference between the amounts computed in (b) and (c), The
result is the final and concluding payment.
Illustrative Examples:
Example 10:
Ms. Christy borrows 5,000 with interest at 12% compounded
semiannually. She will discharge the debt by paying PS00 semiannually.
a) Find the number of regular payments to be made.
b) Find the final and concluding payment if there is.
Solution:
Given: A=P5,000 r=0.12 R=P500
i=0.06 m=2
Required: a) n
b) concluding payment
log} 1— AW 4
Formula: n= £ S,=R G+) ' =
= log(!+i) R i
ft
Fy =Pil+i)
Computations:
a) number of regular payments
Jog| 1 22000-06) | oof 300
a 500 500} ___log(0.4)
—log(1+0.06) = 0.025305865 0.025305865
0.397940008
0.025305865
=15.72520871
Thus, there are 15 regular payments but these are not enough cy
discharge the debt of Ms. Christy.
b) To find the concluding payment, we use ny =16.
|
|
b.1) compute the amount of the 16 regular payments |= P12,336.26
(1+0.06)!6
St y=
o{ gf tis
p.2) Accumulate P5,000 for n.
1 =16 periods at i=0.06.
Fy =5, 16
‘A = 5:000(1 + 0.06)" = 5,000(2.540351685) = P12,701.76
b.3) Get the difference between the amounts in (b.1) and (b.2)
concluding payment = 12,701.76 - 12,336.26 = P365.50
Thus, P365.50should be the last payment for the debt to be totally
discharged.
Example 11:
"student deposits p20 each quarter in a savings bank paying 12%
compounded quarterly. If she desires to accumulate 710,000, how many full
deposits must she make? How much will the final deposit be if it is made 3
months after the last full deposit of P200?
Solution:
Given: $= P10,000= Fy r=0.12 R=P200
i=0.03 m= 4
Required: (a) (b) final deposit
sO.
log 1-R ai"
ook 52
Formulas: "= 5041)
Computations:
a) number of deposits of P200
00
10,000(0.03)) jog 1+ 2%
10,000(0.03) } Jog)
log} 1+ 200 200 = 0.397940008 = 30.999
n=— og + 0.03) Tog(l.03) _0.012837224
ular deposits of P200 with a final deposit less
Hence, there will be 30 re8!
than P200.
b) final deposit
(0.03771 =1
3
)
10,000 — mf -l F 10,000 — 9,800.54 = 199.46
)
Thus, a final di
Piao al deposit of P144.46 must be made to complete the amount of.7 The Amount, Present y,
5 Annuity Due alue,
j *
oe na Sroant 5° of an annuity due is the sum of all accumulated
aly ae mrs ie at the end of the term. The present value A* of
an 7 im 0}
time of the first payment, all present values of the periodic payments at the
To find the amount, prese t value
due, the following formula eH be me ee aD eh
For the present value of an annuity due
pi-n
s*_p 1-A+i)
A ea) (3.10)
For the amount of an annuity due
4 pnt _
5 {ea (3.11)
For the periodic payment given the amount of an annuity due
/
(3.12)
For the periodic payment given the present value of an annuity due
*
A (i) ‘
R=| ——~—_ (3.13)
=(+i!- 8 4i
For cash price
CP=DP+A" (3.14)
Nlustrative Examples
Example 12:
Find the present value and the amount of the annuity due with PS00
Payable quarterly for 9.25 years. Money is worth 10% compounded quarterly.
Solution:
0.10
Given: R=P500 === 0.025 m=4 n=95(4)=37
Required: A” and S*i
easy?
i
| 4
Formula; A" “f
Computations:
36 =0.411093723
+g (1-(1+0.025) 1-041 4)
= 500) ————_— +1 |= 500. ——
A 500 025 { oes
= sof 2588906276 | | 500(23,55625104 + 1) = P12,278.12
0.025
38
57 250g] (+ 0.025)" =I | sof 1555682416 _ 1 )- 730,613.65
0.025 0.025
Therefore, the present value and the amount of the annuity are
P12,278.12 and P30,613.65 respectively.
Example 13:
What sum should be invested at the beginning of each quarter at 18%
compounded quarterly in order to have P45,000 in a fund 6 years from now?
Solution:
Given: s* = P45,000 i218 -o045 m=4 n=6(4)=24
Required: R
#
Formula: R= AO
gentt) 4
Computation:
45,000(0.045) 2,025
R=| |= __ p93,
; +0.045)?5 ~ 10,045 1.960434457 7
Thus, 1,032.93 must be invested every beginning of each quarter for 6
years.
Example 14:
A P26,500debt bears interest at 23:
be repaid in installments at the beginnin,
months. Find the semiannual payment.
% compounded semiannually. It is !?
g of every 6 months for 5 years and 6
Solution:
Given: A* = P26,500 i= 03 os r= 23%
a
t=5Syrs m=2 n=(5.5)(2)=11
Required:Os
Formula: R= A
1-(4i)! "+i
Computation:
R | 26,500(0.115)
HO 3,915.62
jetteoatsy" eois| 0778293685
Thus, P391562 must be paid at the beginning of each 6 months for 5
years and 6 months.
pxample 15:
Velay purchased a car. She paid 120000 down and P1000 payable at
ing of each month for 2 years. If money is worth 16% compounded
the b
monthly, what is the equivalent cash price of the car?
Solution:
A ._ 0.16
Given: DP = P120,000 R=P10,000 r=0.16 are
t=2 n=2(12)=24 m=12
Required: CP
. I-n
Formula: CP=DP+ i.
t
Computations:
0.16 3
I- lt
CP =120,000+ 10.0 ue
120,000 +10,000(20.6958529 = 120,000+ 206.958.5291 = P326,958.53
Thus, the cash price of the car is P326,958.53.3,8 The present value, amount, and periodic payment ofa
deferred annuity
The present value of a deferred annuity is the sum of all the present
yalues of the periodic payment made after the deferred period. The amount ofa
deferred annuity is the sum of all the accumulated periodic payments made, at
ihe end of the deferred period, up to the end of the term of the annuity.
To find the present value, amount and periodic payment of a deferred
annuity, the following formulas will be used:
For a present value problem
wd, -(p+d)
eoprianen 0 (915)
i
aw
he 3.1
aso? a4 Ot an
where; p = number of payment periods .
d= number of deferred periods
For an amount problem
ne
= aa (3.17
pj} (3.18)
(i+i)"-1
Note: To compute the number of deferred payment periods use the following:
a) If periodic payment is made on the succeeding year, multiply the
number of deferred years by m.
lustrative Example:
The semiannual payment of the annuity is deferred for 3 years, th
d= 2(3) = 6 is the number of deferred aaee eet
b) If periodic payment is due at the end of the deferment ye:
multiply the number of deferred years by mand subtract I a,Mlustrative Example:
The first semiannual payment is due at the end of 4.5 years
deferred years = 4.5
m=2
deferred periods d= 2(4.5)- 1 =8
If periodic payment is due at the end of the deferment years and the
last payment is due at the end of a specified number of years the
following should be applied:
* get the difference between the specified number of years when the last
payment should occur and’ the number of deferment years
* multiply the deferment years by mthen subtract 1
¢ multiply the difference by mthen add 1
Illustrative Example:
The first quarterly payment is due at the end of 3 years and the last
quarterly payment is due at the end of 7 years.
difference: 7-324
deferred years: 3 years
d= 4(3)=12-1=11
p=4(4)+1=17
Illustrative Examples:
Example 16:
Find the present value of a deferred annuity of P200 every end three
months for 6 years that is deferred for 4 years, if money is worth 15% converted
quarterly.
Solution:
Graphical Illustration:
number of deferred years
(with 4(4) = 16 periods)
6 j 5 t 5 6 7 8 9 10
total number of payment periods
(with 4(6) = 24 periods) iGiven: R= P200 d=4(4)=16 7 =15%=0.15
p=46)=24 m=4 pol yeas
Required: A*
yd e
Formula: A" = jertawa)
i
Computation:
at = 2o¢ 400375)" 18 40.0875)"
0.0375
Se
0.0375
‘Thus, ‘the present value of the deferred annuity is P1,736.16.
id
| 200(8.68082493) = P1,736.16
the present value of an annuity if the first quarterly payment of
plosdis made at the end of 5. years for 8 years. Money is worth 18.5%
compounded quarterly.
Solution:
Graphical Illustration:
deferment years
{with 5(4) - 1 = 19 payments)
| | i | | | | | ;
Pe te tte hs
4 term of annuity
first payment (with 4(8) = 32 payments)
Note: The first payment coincided with the end of 5 years and at the
beginning of the 6” year.
Given: R= P1250 d=4(5)-1=20-1=19 r=18.5%=0.185
p=4(8)+1=3241=33 m=4
Required: A”
Formula:Computation:
-19 ~52
A® 1,250) {1 +.0.04625)" 1” ~ (1 + 0.04625)
0.04625
=1,251 DE TOEG 109676086 =1,250(7.09839959) = P8,872.99
0.04625
Thus, the present value of the annuity due is P8,872.99.
Example 18:
If money is worth 20% compounded quarterly, find the present value of
2,000 annuity every 3 months, the first of which is due at the end of 5 years
and the last at the end of 10 years.
Solution:
Graphical Illustration:
deferment years
(with 4(5) - 1 = 19payments)
first payment payment years
last payment
(with 4(5) + 1 = 21 payments)
Given: R= P2,000 i=—=005 r=20%=0.20
4
d=4(5)-1=19 m=4 p=4(5)+1=21
Required: A*
Formula: A* cet oncg e =e"
i
Computation:
4 =2.99¢ +005)" 9 -0-+0.05)~40
” 0.05
ey wo] SST —0.142045682
= 2,000(5.0737655) = P10,147.53
bas | 0004 )= PIO
Thus, the present value of the annuity due is P10,147.53.Example 19:
7 Warren borrowed plogooftom. the faculty association credit
mperane that charges interest at 12% compounded monthly. He promised to
pay off the loan in 10 monthly payments, The fist payment is to be made a the
eat of 3 years. Find the monthly payment.
Solution:
Given: A = P10,000 d=12()-1=35 r=12%=0,12
p=l0 m=12 iat ao
iH)
Required: R
A‘)
Formulas 98=———————
det cag OH
Computation:
10,000(0.01) 100 SA
en a els
(4001) ~> ~(1+00) (0.705914199 -0.639054915
R=
therefore, the monthly payment is P1495.68,