Ordinary Annuity

S.Y.Tan
Ordinary Annuity
 Annuity
a sequence of equal payments made at equal time
intervals
– Examples: daily wages, periodic payments of
installment purchases, monthly rent, annual
insurance premiums
• Payment interval – the time between successive
payments
• Term – the time between the first and last
payment intervals
• Periodic payment (R) – the amount of each
payment
S.Y.Tan
Ordinary Annuity
 R … R R R

First payment interval Last payment interval

Term

• The time between two consecutive payments of an

annuity is called payment interval or payment period.

• Payments maybe made monthly, quarterly, semi-

annually, annually or every 2 months or every 4
months.

S.Y.Tan
Ordinary Annuity
Types of Annuity
• Simple annuity – an annuity for which the
payment period is the same as the interest
period
– Example: An annuity for which the interest rate is
compounded monthly and payments are also
made monthly
• General annuity – interest and payment
periods do not coincide with one another
- Example: An annuity for which the interest rate is
compounded quarterly while payments are made
monthly
S.Y.Tan
Ordinary Annuity
Classification of Annuity
• Annuity certain – an annuity where payments
begin and end at fixed times.
– Example: installment payments for certain
purchase made
• Contingent annuity – payments are
dependent on an event that can not be
foretold
- Example: premium on life insurance policy

S.Y.Tan
Ordinary Annuity
3 kinds of Annuity Certain (Simple Annuity)
Ordinary annuity – an annuity where payments
are made at the end of each payment interval
Ordinary annuity of n payments

R R R R R R R

0 1 2 3 4 n-2 n-1 n

Annuity due – an annuity where payments are made

at the beginning of each payment interval
Annuity due of n payments

R R R R R R R

0 1 2 3 4 n-2 n-1 n

S.Y.Tan
Ordinary Annuity
Deferred annuity - an annuity wherein the first
payment interval does not coincide with the first
interest period. The first payment is put off to some
later date.
Deferred annuity of n payments

R R R R R

0 1 2 d-2 d-1 d d+1 d+2 d+(n-2) d+(n-1) d+n

1st payment starts on the (d+1)th period

NO payment for d periods

S.Y.Tan
Ordinary Annuity
Ordinary Annuity
Amount of an Ordinary annuity (F)
– value of annuity in one lump sum amount at
the end of the term
– value of annuity on the last payment date
– sum of the accumulated values of all
payments at the end of the term or on the last
payment date
F
R R R R R R R

0 1 2 3 4 n-2 n-1 n

S.Y.Tan
Ordinary Annuity
 SUM=F

R R R R R R R

0 1 2 3 4 n-2 n-1 n

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Ordinary Annuity
F is the amount of an ordinary annuity of n payments
R is the periodic payment of the annuity
i is the interest rate per period
n is the total number of payments or periods

S.Y.Tan
Ordinary Annuity
Ex 1 Find the amount of an annuity of P3000 paid at the end of every 6
months for 20 years if money is worth 6.24% converted semi-annually.

F = 232,457.71

3000 3000 3000 3000 3000 3000 3000

0 1 2 3 4 38 39 40 (semi-annual periods)

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Ordinary Annuity
Ex 2 In order to create a fund for his forth coming business venture,
Matthew decides to deposit P5000 in a fund at the end of each month. If the
bank pays 4% compounded monthly on his deposits, how much is in the
fund at the end of 2 years?

F = 124,714.44

5000 5000 5000 5000 5000 5000 5000

0 1 2 3 4 22 23 24 (months)

S.Y.Tan
Ordinary Annuity
Ordinary Annuity
Present Value of an Ordinary annuity (P)
– value of annuity in one lump sum amount at
the beginning of the term
– value of annuity at one period before 1st
payment date
– sum of the discounted values of all payments
at the beginning of the term or at one period
before the 1st payment date
P

R R R R R R R

0 1 2 3 4 n-2 n-1 n

S.Y.Tan
Ordinary Annuity
P= SUM

R R R R R R R

0 1 2 3 4 n-2 n-1 n

S.Y.Tan
Ordinary Annuity
value of annuity at
value of annuity on
one period before P F last payment date
1st payment date

R R R R R R R

0 1 2 3 4 n-2 n-1 n

P is the present value of an ordinary annuity of n payments

R is the periodic payment of the annuity
i is the interest rate per period
n is the total number of payments or periods

S.Y.Tan
Ordinary Annuity
 Ex 4 Find the present value of an annuity of P3000 paid at the end of every 6
months for 20 years if money is worth 6.24% converted semi-annually.

68,018.62 = P F = 232,457.71
fr Ex 1
3000 3000 3000 3000 3000 3000 3000

0 1 2 3 4 38 39 40 (semi-annual periods)

S.Y.Tan
Ordinary Annuity
Ex 5. An LCD TV is purchased with down payment of P30,000 and
P4624.50 at the end of each month for two years to discharge all
principal and interest at 15% converted monthly. Find the cash price
of the TV set.
Cash value (CV) = Down payment (D) + Present Value (P)

4624.5 4624.50 4624.50 4624.50 4624.50 4624.50

0
0 1 2 3 4 22 23 24

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Ordinary Annuity
Ex 6. Linda is paying P10,000 every 3 months for 3 years for a loan she
acquired. If she is being charged an interest of 5% converted quarterly,
how much was her original loan?

P
1000 10000 10000 10000 10000 10000 10000
0
0 1 2 3 4 10 11 12

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Ordinary Annuity
Ex 7 . Jane deposits P14,000 every 3 months in a savings account
that pays 6% compounded quarterly. Assuming that she does not
withdraw any amount, how much would she have in her account at
the end of 4 years?

1400 14000 14000 14000 14000 14000 14000

0
0 1 2 3 4 14 15 16

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Ordinary Annuity
Ex 8 A multimedia workstation is for sale at Php28,000 every six
months for two years at 12% compounded semi-annually or at
Php20,000 down and Php7,040.15 each month for the next 12 months
at 15% compounded monthly. Which terms should you choose?

cheaper,
1st offer better

P P
2800 28000 28000 28000 7040.1 7040.15 7040.15 7040.15
0 5

0 1 2 3 4 0 1 2 3 4 10 11 12

S.Y.Tan
Ordinary Annuity
Ex 9 . In preparation for the college education of his son, Mr Yanga
will deposit P2400 at the end of each month for 5 years in a fund
earning 4.5% compounded monthly. How much is in the fund (a) just
after 15th deposit ? (b) just after the last deposit?

2400 2400 2400 2400 2400 2400 2400 2400

0 1 2 3 4 15 16 59 60

S.Y.Tan
Ordinary Annuity
Ordinary Annuity
Finding periodic payment (R) of an Ordinary annuity
Formulas for the amount F, present value P of an ordinary annuity:

P F

R R R R R R R

0 1 2 3 4 n-2 n-1 n

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Ordinary Annuity
Ex 1 A newly-formed business bought a property worth P14.5M.
They paid a downpayment of P3M with an agreement to pay the
balance in 10 years at 12% compounded quarterly. How much is the
quarterly payment?

11,500,000 = P
R R R R R R R

0 1 2 3 4 38 39 40

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Ordinary Annuity
Ex 2 Jim and his partners want to have P4.2M in 3 years. They make
semi-annual deposits in an account which pays interest at 7%
compounded semi-annually. Find their semi-annual deposit.

F = 4,200,000
R R R R R R

0 1 2 3 4 5 6

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Ordinary Annuity
 Ex 3 On his retirement at age 60, Ric receives P800,000 as a share
of a pension fund. His heir invests this sum at 6.36% compounded
quarterly. How much could Ric or his heir regularly withdraw at the
end of each 3 months for the next 25 years?

800,000 = P
R R R R R R R

0 1 2 3 4 98 99 100

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Ordinary Annuity
Ex 4 At the end of each year for 10 years, a corporation will deposit
equal sums in a depreciation fund to provide for the replacement of
machinery worth P500,000. If the fund accumulates at 8% effective,
how much must each deposit be?

F = 500,000
R R R R R R R

0 1 2 3 4 8 9 10

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Ordinary Annuity
Ex 5 A loan of P50,000 with interest at 15% compounded every 4
months is to be repaid by 24 equal payments made at the end of
every 4 months. Find the size of each payment.

50,000 = P
R R R R R R R

0 1 2 3 4 22 23 24

S.Y.Tan
Ordinary Annuity