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Genmathg11 q2 Mod7 Annuities Version2
Genmathg11 q2 Mod7 Annuities Version2
General Mathematics
Quarter 2 – Module 7
Annuities
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General Mathematics
Quarter 2 – Module 7:
Annuities
What I know…
PRE-TEST
Direction: Choose the letter of the correct answer and write on the separate
sheet of paper.
__________3. The sum of future values of all the payments to be made during
the entire term of annuity
a.) Annuity
b.) Present Value of an annuity
c.) Future Value of an annuity
d.) Periodic Payment
__________4. The sum of all present values of all the payments to be made
during the entire term of the annuity.
a.) P12,806.63
b.) P12,860.36
c.) P12,860.63
d.) P12,806.36
a.) P15,024.31
b.) P15,204.31
c.) P15,402.31
d.) P15,420.31
__________10. A teacher saves P5,000 every 6 months in the bank that pays
0.25% compounded monthly. How much will be her savings after
10 years?
a.) P101,197.06
b.) P101,179.06
c.) P101,971.06
d.) P101,791.06
__________11. It is an annuity that does not begin until a given time interval
has passed.
__________13. Melvin availed of a loan from a bank that gave him an option to
pay P20,000 monthly for 2 years . The first payment is due after 4
months. How much is the present value of the loan if the interest
rate is 10% converted monthly?
e.) P422,795.78
f.) P422,759.78
g.) P422,579.78
h.) P422,597.78
__________14. Annual payments of P2,500 for 24 years that will start 12 years
from now. What is the period of deferral in the deferred annuity?
e.) 12 periods
f.) 10 periods
g.) 11 periods
h.) 13 periods
REVIEW
You use money in everyday life. In order to buy what you need, you do
transactions involving money.
In the previous lessons, you learned the methods of solving the value of
money under compound and simple interest environment. You have learned to
illustrate and distinguish between simple and compound. You also learned how
to compute for the interest, present value and future value in a simple and
compound interest environment. As well as solve problems involving real life
situations of simple and compound interest.
What’s new…
❖ ANNUITY
An ANNUITY is a sequence of equal payments (or deposits) made at a
regular interval of time.
ANNUITY
The sum of future value of all the payments to be made during the entire
term of the annuity.
The sum of present value of all the payments to be made during the entire
term of the annuity.
ILLUSTRATION
0 1 2 3 4 5 n
EXAMPLE 1:
Time 0 1 2 3 4 5 6
(in months)
Payment/
Deposit 3,000 3,000 3,000 3,000 3,000 3,000
3,000
3,000 (1 + 0.0075)
3,000 (1 + 0.0075) 2
3,000 (1 + 0.0075) 3
3,000 (1 + 0.0075) 4
3,000 (1 + 0.0075) 5
(2) Add all the future values obtained from the cash flow.
3,000 = 3,000
3,000 (1 + 0.0075) = 3,022.50
3,000 (1 + 0.0075) 2 = 3,045.17
3,000 (1 + 0.0075) 3 = 3,068.01
3,000 (1 + 0.0075) 4 = 3,091.02
3,000 (1 + 0.0075) 5 = 3,114.20
𝑖
Note: j =
𝑚
n = mt
(3) Solution using formula 1
Given:
A(t) = ? R = 3,000 i = 0.09 m = 12 t (annually) = 6/12
𝑖 𝑚𝑡
(1+ 𝑚) −1
𝐹 = 𝑅[ 𝑖 ]
𝑚
0.09 12(0.5)
(1+ ) −1
= 3,000 [ 12
0.09 ]
12
(1+ 0.0075)6 −1
= 3,000 [ ]
0.0075
(1.0075)6 −1
= 3,000 [ ]
0.0075
1.045852235−1
= 3,000 [ ]
0.0075
0.458522351
= 3,000 [ ]
0.0075
= 3,000 ( 6.113631347)
F = 18, 340.89
Therefore, the amount of future value of Mrs. Manda’s savings after 6 months
is P18,340.89.
EXAMPLE 2:
(1.001666)18 −1
150,000 = 𝑅 [ ]
0.001666
1.030428801−1
150,000 = 𝑅 [ ]
0.001666
0.0304288015
150,000 = 𝑅 [ ]
0.001666
150,000 = R ( 18.2572809)
18.2572809 18.2572809
8,215.90 = R
EXAMPLE 3:
Given:
Periodic payment (R) = P3,000
Term (t) = 6 months
Interest rate per annum (annually) (i) = 0.09/9%
Number of conversion per year (m) = 12
𝑖 0.09
Interest rate per period 𝑗 = = = 0.0075
𝑚 12
(1) Illustrate the cash flow in time diagram and Find the Present value
of all the payments at the end of term (t=6).
Time 0 1 2 3 4 5 6
(in months)
Payment/
Deposit 3,000 3,000 3,000 3,000 3,000 3,000
3,000 (1 + 0.0075) -1
3,000 (1 + 0.0075) -2
3,000 (1 + 0.0075) -3
3,000 (1 + 0.0075) -4
3,000 (1 + 0.0075) -5
3,000 (1 + 0.0075) -6
(2) Add all the present values obtained from the cash flow.
3,000 (1 + 0.0075) -1 = 2,977.667
3,000 (1 + 0.0075) -2 = 2,955.501
3,000 (1 + 0.0075) -3 = 2,933.50
3,000 (1 + 0.0075) -4 = 2,911.663
3,000 (1 + 0.0075) -5 = 2,889.988
3,000 (1 + 0.0075) -6 = 2,868.474
𝑖
Note: j =
𝑚
n = mt
(3) Solution using formula 2
Given:
P = ? R = 3,000 i = 0.09 m = 12 t (annually) = 6/12
𝑖 −𝑚𝑡
1−(1+ )
𝑚
𝑃 = 𝑅[ 𝑖 ]
𝑚
0.09 −(12(0.5))
1−(1+ )
= 3,000 [ 12
0.09 ]
12
1−(1+ 0.0075)−6
= 3,000 [ ]
0.0075
1−(1.0075)−6
= 3,000 [ ]
0.0075
1−0.9561580178
= 3,000 [ ]
0.0075
0.04384198223
= 3,000 [ ]
0.0075
= 3,000 ( 5.84559763)
P = 17,536.79
Therefore, the amount of Present value of Mrs. Manda’s savings after 6
months is P17,536.79.
EXAMPLE 4:
A certain fund currently has P100,000 and is invested at 3% interest
compounded annually. How much withdrawal can be made at the end of each
year so that the fund will have zero balance at the end of 12 years?
SOLUTION:
Since withdrawals are made every end of the year, then this ordinary annuity.
Given:
Periodic payment (R) = P100,000
Term (t) = 12 years
Interest rate per annum (annually) (i) = 0.03/3%
Number of conversion per year (m) = 1
𝑖 0.03
Interest rate per period 𝑗 = = = 0.03
𝑚 1
𝑖 −𝑚𝑡
1−(1+ )
𝑚
𝑃 = 𝑅[ 𝑖 ]
𝑚
0.03 −(12(1))
1−(1+ )
100,000 = 𝑅 [ 1
0.03 ]
1
1−(1+ 0.03)−12
100,000 = 𝑅 [ ]
0.03
1−(1.03)−12
100,000 = 𝑅 [ ]
0.03
1−0.7013798802
100,000 = 𝑅 [ ]
0.03
0.2986201198
100,000 = 𝑅 [ ]
0.03
100,000 = R ( 9.954003994)
9.954003994 9.954003994
10,046.21 = R
Hence, the amount of yearly withdrawal is P10,046.21.
Periodic payment R can also be solved using the formula for amount
Future value F or Present Value P of an annuity.
𝑖 𝑚𝑡
(1+ 𝑚) −1 𝐹
𝐹 = 𝑅[ ] 𝑅=
𝑖 𝑖 𝑚𝑡
𝑚 ൬1+ ൰ −1
𝑚
൦ 𝑖 ൪
𝑚
n = mt
where R is the regular payment
P is the present value of an annuity
F is the future value of an annuity
j is the interest rate per period
n is the number of payments
What is it…
___________________________________________________________________________
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Complete the sentence below. Write your answers on a separate sheet of paper.
Solve for the following problems. Answer as indicated. Write your answers in a
separate sheet of paper.
2. In order to save for her high school graduation, Marie decided to save
P200 at the end of each month. If the bank pays 0.250% compounded
monthly, how much will her money be at the end of 6 years?
What’s in…
REVIEW
In the previous lessons, you learned to illustrate a Simple Annuity and you
solve the present and future values of simple Annuity. You also compute for the
periodic payment of simple annuity. As well as solve problems involving real life
situations on simple Annuities.
What’s new…
❖ GENERAL ANNUITY
A GENERAL ANNUITY is an annuity where the length of the payment
interval is not the same as the length of the interest compounding period.
𝑖
Note: j = , n = mt
𝑚
Where: R = is the regular payment
j = is the equivalent interest rate per payment interval
converted from the interest rate per period
n = the number of payments
EXAMPLE 1:
Cash Flow
F
1,000 1,000 1,000 . . . . . . . . . . . 1,000 1,000
0 1 2 3 . . . . . . . . . . . . . 179 180
(1) Convert 6% compounded quarterly to its equivalent interest rate for
monthly payment interval.
F1 = F2
12𝑡 4𝑡
𝑖12 𝑖4
P (1 + ) = P (1 + )
12 4
12𝑡 4𝑡
𝑖12 𝑖4
(1 + ) = (1 + 4 )
12
12
𝑖12 0.06 4
(1 + ) = (1 + )
12 4
12
𝑖12
(1 + ) = (1.015)4
12
1
𝑖12
(1 + ) = ((1.015)4 )12
12
𝑖12 1
(1 + ) = ((1.015)3
12
1
𝑖 12
= (1.015)3 − 1
12
𝑖 12
= 0.00497521 = j
12
(2) Apply the formula in finding the future value of an ordinary annuity
using the computed equivalent rate.
(1+ 𝑗)𝑛 −1
𝐹 = 𝑅[ ]
𝑗
(1+ 0.00497521)180 −1
𝐹 = 1,000 [ ]
0.00497521
𝑭 = 𝟐𝟗𝟎, 𝟎𝟖𝟐. 𝟓𝟏
SOLUTION
The Cash Flow for this problem is shown in the diagram below.
Cash Flow
0 1 2 3
(1) Convert 8% compounded quarterly to its equivalent interest rate for each
payment interval
F 1 = F2
1𝑡 4𝑡
𝑖1 𝑖4
P (1 +
1
) = P (1 +
4
)
1𝑡 4𝑡
𝑖1 𝑖4
(1 + 1 ) = (1 + 4 )
1
𝑖1 0.08 4
(1 + 1 ) = (1 + )
4
1
𝑖1
(1 + 1 ) = (1.02)4
𝑖1 1
(1 + 1 ) = ((1.02)4 )
𝑖1
(1 + 1 ) = ((1.02)4
𝑖1
= (1.02)4 − 1
1
𝑖1
= 0.082432 = j = 8.24%
1
1−(1+0.082432)−3
𝑃 = 38,973.76 [ ]
0.082432
1−(1+0.082432)−3
𝑃 = 38,973.76 [ ]
0.082432
1−0.7284462444
𝑃 = 38,973.76 [ ]
0.082432
0.2715537556
𝑃 = 38,973.76 [ ]
0.082432
𝑃 = 38,973.76[2.565829711]
P = 100,000
Hence, Ken borrowed P100,000 from Kat
EXAMPLE 3:
Mr. Ribaya received two offers on a lot that he wants to sell. Mr.
Ocampo has offered P50,000 and a P1million lump sum payment 5 years from
now. Mr. Cruz has offered P50,000 plus P40,000 every quarter for five years.
Compare the fair market value of the two offers if money can earn 5%
compounded annually. Which offer has a higher market value?
SOLUTION:
We illustrate the cash flows of the two offer using time diagram
50,000 1 million
0 1 2 3 4 5
0 1 2 3 . . . . . . . . . . . . . . . . 20
Choose a focal date and determine the values of the two offers at that focal date.
For example the focal date can be the date at the start of the term.
Since the focal date is at t = 0, compute for the present value of each offer.
Mr. Ocampo’s Offer: Since P50,000 is offered today, then its present value is
still P50,000. The present value of P1,000,000 offred 5 years from now is
P = F (1 + j)-n
P = 1,000,000 (1 + 0.05)-5
P = P783, 526.20
1
𝑖4
(1 + 4 ) = (1.05)5(20) -1
𝑖4
(1 + 4 ) = 0.012272234
1−(1+0.012272)−20
𝑃 = 40,000 [ ]
0.01227222
P = 705,572.70
Hence, Mr. ocampo’s Offer has a higher market value. The difference
between the market values of the two offers at the start of the term is
833,526.20 – 756,572.70 = P77,953.50
What is it…
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3. Express the process in finding the Present and future value of General
ordinary annuity.
_________________________________________________________________________
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_________________________________________________________________________
_________________________________________________________________________
________________________________________________________________________
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What’s more..
COMPANY A COMPANY B
P150,000 at the end of 3 years P25,000 at the end of each
P300,000 at the end of 5 years quarter for 5 years
Complete the sentence below. Write your answers on a separate sheet of paper.
Solve for the following problems. Answer as indicated. Write your answers in a
separate sheet of paper.
1. Mrs. Remoto would like to buy a television (TV) set payable for 6 months
starting at the end of the month. How much is the cost of the TV set if
her monthly payment is P3,000 and interest is 9% compounded semi-
annually?
2. Kat received two offers for investments. The first one is P150,000 every
year for 5 years at 9% compounded annually. The other investment
scheme is P12,000 per month for 5 years with the same interest rate.
Which fair market value between these offers is preferable?
Lesson
3
Deferred Annuity
What’s in…
REVIEW
In the previous lessons, you learned the methods of solving the value of
money under General annuities. You were able to find the future and present
value of general annuities and compute the periodic payment of a general
annuity. And you also solve for the fair market value of a cash flow stream that
includes an annuity. As well as solve problems involving real life situations of
General annuities.
What’s new…
❖ DEFERRED ANNUITY
Annuity (t)
A DEFERRED ANNUITY is a kind of annuity whose payments (or deposits)
start in more than one period from the present.
❖ PERIOD OF DEFERRAL
The time between the purchase of an annuity and the start of the payments
for the deferred annuity.
ILLUSTRATION
R* R . . . . . . . . . . . . . . . R* R R. . . R
In the time diagram the period of deferral is k because the regular payments of
R start at the time k+1.
The rotation R* represent k”artificial payments”, each equal to R but are not
actually paid during the period of deferral.
Where:
P = Present value of the deferred annuity
R = regular payment
m = compounding periods
i = interest rate
k = period of deferral
t = time
Time 0 1 2 . . . . . .. . . 12 13 14 15 16 . . . . 35 36
(in months)
0.025 −(12(2))
0.025 −1(12) 1−(1+
12
)
𝑃 = (1 + ) 5,000 [ 0.025 ]
12
12
1−(1.002083333)−24
𝑃 = (1.002083333)−12 (5,000) [ ]
0.002083333
𝑃 = (0.9753352758) (5,000)[23.38612786]
𝑃 = (0.9753352758) (𝟏𝟏𝟔, 𝟗𝟑𝟎. 𝟔𝟑𝟗𝟑)
𝑷 = 𝟏𝟏𝟒, 𝟎𝟒𝟔. 𝟓𝟖
Time 0 1 2 . . . . . .. . . 12 13 14 15 16 . . . . 35 36
(in months)
P116,930.64
P114,046.58
Notice that there are two stages in finding the present value of a
deferred annuity: (1) find the value of the payment at the start of the payment
period by using the formula for the present value of an annuity, and then (2) fin
the value of the amount to be obtained at the start (or time 0) by using the
formula for the present value of a single amount given in the formula of the
resent value of a deferred annuity.
If the period is k-years, you call the annuity a k-year deferred annuity
What is it…
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2. Find the present value of a 3-year deferred annuity with regular payments
of P10,000 compounded annually at an interest rate of 3%.
Complete the sentence below. Write your answers on a separate sheet of paper.
Solve for the following problems. Answer as indicated. Write your answers in a
separate sheet of paper.
4. Melvin availed of a loan from a bank that gave him an option to pay
P20,000 monthly for 2 years . The first payment is due after 4
months. How much is the present value of the loan if the interest
rate is 10% converted monthly?
5. Quarterly payments of 300 for 9 years that will start 1 year from now,
What is the period of deferral in the deferred annuity?
Assessment…
POST-TEST
Direction: Choose the letter of the correct answer and write on the separate
sheet of paper.
__________3. The sum of future values of all the payments to be made during
the entire term of annuity
a.) Annuity
b.) Present Value of an annuity
c.) Future Value of an annuity
d.) Periodic Payment
__________4. The sum of all present values of all the payments to be made
during the entire term of the annuity.
a.) P12,806.63
b.) P12,860.36
c.) P12,860.63
d.) P12,806.36
__________6. Find the present value of an ordinary annuity with regular
quarterly payments worth P1,000 at 3% annual interest rate
compounded quarterly at the end of 4 years.
a.) P15,024.31
b.) P15,204.31
c.) P15,402.31
d.) P15,420.31
__________10. A teacher saves P5,000 every 6 months in the bank that pays
0.25% compounded monthly. How much will be her savings after
10 ears?
a.) P101,197.06
b.) P101,179.06
c.) P101,971.06
d.) P101,791.06
__________11. It is an annuity that does not begin until a given time interval
has passed.
__________13. Melvin availed of a loan from a bank that gave him an option to
pay P20,000 monthly for 2 years . The first payment is due after 4
months. How much is the present value of the loan if the interest
rate is 10% converted monthly?
a.) P422,795.78
b.) P422,759.78
c.) P422,579.78
d.) P422,597.78
__________14. Annual payments of P2,500 for 24 years that will start 12 years
from now. What is the period of deferral in the deferred annuity?
a.) 12 periods
b.) 10 periods
c.) 11 periods
d.) 13 periods
1. Mr. Quijano decided to sell their farm and to deposit the fund in a bank.
After computing the interest, they learned that they may withdraw
P480,000 yearly for 8 years starting at the end of 6 years when it is time
for him to retire. How much is the fund deposited if the interest rate is 5%
converted annually?
Key Answers…
References: