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, there4 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 aieo PG meaner. iat teeution 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