LESSON 3 SIMPLE ANNUITY

Learning Competencies: At the end of the lesson, the learner should be able to
1. Illustrates simple annuities.
2. Distinguishes between simple and general annuities.
3. Finds the future value and present value of simple annuities.
4. Calculates the fair market value of a cash flow stream that includes an annuity.

A large number of personal and business

transactions involved a series of regular payments.
Examples are payments of insurances premiums, leases,
mortgages, pensions, personal loans, rent, salary, long term
loans, etc. In this lesson we will learn the main type of
annuities and some of the terminologies of annuities. Many
applications of annuities involve in a single amount or
payment that is economically comparable to an annuity. In
other words, these applications involve the present value of
future value of an annuity.

1.1 UNDERSTANDING ANNUITY

A. What Is an Annuity?
An annuity is a contract between you and an insurance company in which you
make a lump-sum payment or series of payments and, in return, receive regular
disbursements, beginning either immediately or at some point in the future
The goal of an annuity is to provide a steady stream of income, typically during
retirement. Funds accrue on a tax-deferred basis an—like401 ( k ) s contributions—can
only be withdrawn without penalty after age 59½.
Many aspects of an annuity can be tailored to the specific needs of the buyer. In
addition to choosing between a lump-sum payment or a series of payments to the
insurer, you can choose when you want to annuitize your contributions—that is, start
receiving payments. An annuity that begins paying out immediately is referred to as
an immediate annuity, while one that starts at a predetermined date in the future is
called a deferred annuity.
The duration of the disbursements can also vary. You can choose to receive
payments for a specific period of time, such as 25 years, or for the rest of your life. Of
course, securing a lifetime of payments can lower the amount of each check, but it
helps ensure that you don't outlive your assets, which is one of the main selling points of
annuities
B. Classification of Annuity based on Payment Schedule:

1. ORDINARY ANNUITY is an annuity that is paid or received at the end of the time
period (e.g. salaries, stock dividends, etc.)
Example: End of each quarter (every 3 months)
Illustration: (periodic payment is made)

Jan, Feb, Mar,/ Apr, May, Jun,/ Jul, Aug, Sept,/ Oct, Nov, Dec

2. ANNUITY DUE is an annuity that is paid or received at the beginning of the time
period (e.g. rentals, educational insurance plan.)
Example: Beginning of each quarter (every 3 months)
Illustration: (periodic payment is made)

Jan, Feb, Mar,/ Apr, May, Jun,/ Jul, Aug, Sept,/ Oct, Nov, Dec

3. DEFERRED ANNUITY is an annuity in which the first payment is delayed or

deferred for a period of time. (e.g, SSS Salary Loan, Pag-Ibig Salary Loan, some
credit card term, etc.)

C. Classification of Annuity based on Interest Period and Payment Interval

1. SIMPLE ANNUITY is an annuity in which the number of compounding periods

per year coincides with the number of annuity payments per year.

2. GENERAL ANNUITY (or complex annuity) is an annuity in which the annuity

payments and compounding periods do not coincide.

D. Basic Concepts of Simple Annuity

• Payment interval is the length of time between successive payments in an

annuity.
• Term of the Annuity is the total time from the beginning of the first payment to
the end of the last payment interval.
• Periodic Rent is the periodic annuity payment
• Future Value of an Annuity (amount of the annuity) is the sum of the compound
amount of all payments, compounded to the end of the term.
• Present Value of an Annuity is the lump sum required at the beginning.
D. Simple Ordinary Annuity Formulas

(1+i)n−1 F(i) 1−(1+i)−n

F=C [ i ] C=
(1+i)n −1
P=C [ i ]
P (i)
C=
1−(1+i )−n

Where:
F = Future value of ordinary simple annuity
P = Present value of ordinary simple annuity
C = Cash flow/Periodic Payment

( mr )
i = rate of interest per conversion period i=

n= number of payments ( n=mt )

r= interest rate
t= term of the annuity (length of time between the beginning of the first payment
period and the of the last payment period)
m= payment interval (frequency of payment in a year)

3.2 COMPUTING SIMPLE ANNUITY PROBLEMS

A. Computing the Future Value

Example 1: Jerico made a deposit of ₱ 2,000 at the end of each quarter for 2 years at
5 % compounded quarterly. How much is in his account at the end of 2
years?

Solution:
Given: C=₱ 2,000 r =0.05 t=2 m=4
r 0.05
i= = =0.0125 n=mt=( 4 ) ( 2 )=8
m 4

To determine amount we will use

(1+i)n−1
F=C [ i ]
 (1+0.0125)8−1
F=2000 [
0.0125
  ]
F=2000 [ 8.358888095 ]
F=¿ ₱ 16,717.78

Thus, Jerico will have ₱ 16,717.78 at the end of 2years

Example 2: Miya spends ₱ 850 per month on cigarettes. If he stops smoking and
invests the same amount in a plan paying 15 % compounded monthly, how
much will he have after 4years?

Solution:
Given: C=₱ 850 r =0.15 t=4 m=12
r 0.15
i= = =0.0125 n=mt=( 12 ) ( 4 )=48
m 12

To determine amount we will use

(1+i)n−1
F=C [ i ]
(1+0.0125)48−1
F=850 [ 0.0125
  ]
F=850 [ 65.228838824 ]
F=¿ ₱ 55,444.13

Thus, Miya will have accumulated ₱ 55,444.13 after 4 years.

ACTIVITY 1. Answer the given problem and show your complete solution.

At the birth of his grandson, Jethro commits to help pay college education. He
decides to make a deposit of ₱ 10,400 at the end of each three months into an
account for 12 years. Find the amount of annuity assuming 10% compounded
quarterly.
B. Computing the Present Value

Example 3: Find the present value of an ordinary annuity whose monthly payment is ₱
2,400 payable for 6 years at 9 % compounded bi-monthly.

Solution:
Given: C=₱ 2400 r =0.09 t=6 m=6
r 0.09
i= = =0.015 n=mt=( 6 )( 6 )=36
m 6

To determine amount we will use

1−(1+i)−n
P=C [ i ]
1−(1+0.015)−36
P=2400 [ 0.015 ]
 

P=2400 [ 27.66068431 ]
P=¿ ₱ 66,385.64

Thus, the accumulated amount after 6 years is ₱ 66,385.64.

Example 4: A certain investment pays back ₱ 3,200 at the end of every six months for
15 years. At the end of 15 years, the investment pays back ₱ 45,000 in
addition to the regular ₱ 3,200. What is the present value of all the
payments if money can earn 4% compounded semiannually?

Solution:
Given for the annuity: C=₱ 3200 r =0.04 t=15 m=2

Given for the lump payment: F=₱ 45000 r =0.04 t=15 m=2
 r 0.04
Therefore; i= = =0.02 n=mt=( 2 ) ( 15 )=30
m 2

To determine amount we will use the formula

1−(1+i)−n
P=C [ i
+] F
( 1+i )n
1−(1+0.02)−30
P=3200 [ 0.02
+ ]45000
( 1+0.02 )30
P=3200 [ 22.39645555 ] +24,843.19
P=¿ ₱ 96,511.85

Thus, the present value of the payment is₱ 96,511.85

ACTIVITY 2. Answer the given problem and show your complete solution.

Eli has decided to make semiannually payments pf ₱ 7,800 at the end of every six
months for 8 years into an investment that he thinks will yield 7 % compounded
semiannually. What lump sum deposited today will result to the same future value?

C. Computing the Cash Flow/Periodic Payment

Example 5: To accumulate ₱ 85,250, Joanna needs to place equal deposits at the end
of every 3 months in a fund which earns 18 % compounded quarterly. If the
 first deposit is made on March 28, 2014 and the last payment, on March 28,
2020, how large should the deposit be?

Solution:
Given: F=₱ 85,250 r =0.18 t=6 m=4
r 0.18
i= = =0.045 n=mt=( 4 ) ( 6 ) +1=25
m 4

To determine amount we will use the formula

F(i)
C=
(1+i)n −1
85250(0.045)
C=
(1+0.045)25−1
3836.25
C=
2.005434457
C=¿ ₱ 1,912.93

Thus, Joana needs to make a regular deposit of ₱ 1,912.93 quarterly.

Example 2: Christopher sold a piece of property for ₱ 1,300,000. A down payment
₱ 500,000 was made and the remainder was to be paid I equal quarter
installments, the first is due 3 months after the date of sale. The interest
was 15% compounded quarterly, and debt was to be amortized in 7 years.
a. What quarterly payment is required?
b. What will be the total amount of payment?
c. How much interest will be paid?
d. What is the total cost of the property?

Solution:
Given: Cash Value=₱ 1,300 , 000 Down Payment=₱ 500 , 000
Present Value=Cash Value−Down Payment=1,300,000−500,000
Present Value=₱ 80,0000
r 0.15
r =0.15 t=7 m=4 i= = =0.0375 n=mt=( 4 ) ( 7 ) =28
m 4
a. What quarterly payment is required? Use the formula,
P (i)
C=
1−(1+i )−n
800,000 (0.0375)
C=
1−(1+ 0.0375)−28
30,000
C=
0.6432754085
 C=¿ ₱ 46,636.32

Thus, the debt will be paid off by a quarterly installment of ₱ 46,636.32

.

b. What will be the total amount of payment?

Total Payments = Periodic Payment x No. of payments
Total Payments = ₱46,636.32 x 28
Total Payments = ₱ 1,305,816.96
The total amount of payments is ₱ 1,305,816.96

c. How much interest will be paid?

Interest = Total Periodic Payments – Original Loans
Interest = ₱1,305,816.96 – ₱800,000
Interest = ₱505,816.96
The interest will amount ₱505,816.96

d. What is the total cost of the property?

Total Cost = Down Payment + Total Periodic Payments
Total Cost = ₱500,000+ ₱ 1,305,816.96
Total Cost = ₱1,805,816.96
The cost of the property is ₱1,805,816.96

ACTIVITY 3. Answer the given problem and show your complete solution.

RAS Software needs ₱ 650,000 in 2 years to meet future needs. What regular
payment would they need to make at the end of each month, at 12 % interest
compounded monthly?
 SUMMARY AND KEY TAKEAWAYS:

 Annuities are insurance contracts that promise to pay you regular income either
immediately or in the future.
 You can buy an annuity with a lump sum or a series of payments.
 The income you receive from an annuity is taxed at regular income tax rates, not
long-term capital gains rates, which are usually lower.
 Simple annuity is an annuity in which the number of compounding periods per
year is equal with the number of annuity payments per year.
 In ordinary annuities, payments are made at the end of each period. With
annuities due, they're made at the beginning of the period.
 The future value of an annuity is the total value of payments at a specific point in
time.
 The present value is how much money would be required now to produce those
future payments.
LESSON 4 GENERAL ANNUITY
Learning Competencies: At the end of the lesson, the learner should be able to
1. Illustrates general annuities.
2. Finds the future value and present value of general annuities.
3. Calculates the fair market value of a cash flow stream that includes an annuity.

An annuity may be an appropriate

retirement vehicle if you are able to forgo use of
the money for several years. Yet, keep in mind
that owning an annuity may entail higher fees and
expenses than some other investment vehicles. In
this lesson you will learn more about general
annuity wherein the annuity payments and
compounding periods do not coincide.

4.1 BASIC CONCEPTS OF GENERAL ANNUITY

• General Annuity is an annuity where the payment interval is not the same as the
interest conversion period.
• Payment interval is the length of time between successive payments in an
annuity.
• Term of the Annuity is the total time from the beginning of the first payment to
the end of the last payment interval.
• Periodic Rent is the periodic annuity payment
• Future Value of an Annuity (amount of the annuity) is the sum of the
compound amount of all payments, compounded to the end of the term.

General Ordinary Annuity Formulas

( 1+f )n−1 Ff 1−( 1+ f )−n Pf

f =( 1+i )c −1 , F=C [ f ]
, C= n
( 1+ f ) −1
, P=¿ C[ f ] , C=
1−( 1+f )
−n

• F=¿ Future value of general annuity

• P=¿ Present value of general annuity
• C=¿ Cash Flow or size of periodic payment
r
• i=¿ interest rate for conversion period ( )m
• m=¿ Number of conversion or payment interval
• t=¿term of the annuity
• k =¿ number of payments per year
• n=¿ total number of payments (tk)
 • r =¿ interest rate per compounding period
• f =¿ effective interest rate per payment interval

• c=¿ Number of conversion periods per payment interval ( mk )

4.2 COMPUTING GENERAL ANNUITY PROBLEMS

A. Computing the Future Value

Example 1: If ₱ 2000 is invested at the end of every year at 8 % compound

semiannually, what will be the total value of the periodic investments after20
years?

Solution:
The total value of the periodic investments corresponds to the future value.
Since the conversion period differs from the payment interval, the future
value will be
Given: C=₱ 2000 r =0.08 t=20 m=2 k =1
r 0.08 m 2
n=t k =20 ( 1 )=20 i= = =0.04 c= = =2
m 2 k 1
First is to compute for f
c
f =( 1+i ) −1
2
f =( 1+0.04 ) −1
f =1.0816−1
f =0.0816

Next calculate for the future value

( 1+f )n−1
F=C [ f ]
( 1+ 0.0816 )20−1
F=2000 [ 0.0816 ]
F=2000 [ 46.58113515 ]
F=₱ 93,162.27

Thus, the total value after 20 years will be ₱ 93,162.27

Example 2: Find the future value of an annuity of ₱ 5,850 payable at the end of each
quarter for 8 years if the rate of interest is 18 % compounded bimonthly.

Solution:
 Given: C=₱ 5850 r =0.18 t=8 m=6 k =4
r 0.18 m 6
n=t k =8 ( 4 )=20 i= = =0.03 c= = =1.5
m 6 k 4

First is to compute for f

f =( 1+i )c −1
f =( 1+0.03 )1.5 −1
f =1.045335831−1
f =0.045335831
Next calculate for the future value
( 1+f )n−1
F=C [ f ]
(1+ 0.045335831)32−1
F=5850 [ 0.045335831 ]
F=5850 [ 69.08998433 ]
F=₱ 404,176.41

Thus, the total value of annuity after 8 years is ₱404,176.41.

ACTIVITY 1. Answer the given problem and show your complete solution.

SJS Financial is paying 9 % interest compounded bimonthly. Find the future value of
₱ 60,000 deposited at the end of every quarter for 4 years.

B. Computing the Present Value

Example 3: Find the present value of an annuity which pays ₱ 1,460 at the end of every
3 months for6 years, if money is worth 9 % compounded monthly?

Solution:
 The Php1,460 represents the periodic payment of annuity and the present
1−( 1+ f )−n
value is missing. Thus, we need to use the formula P=¿ C [ f ]
Given: C=₱ 1,460 r =0.0 9 t=6 m=12 k =4
r 0.09 m 12
n=t k =6 ( 4 )=24 i= = =0.0075 c= = =3
m 12 k 4

First is to compute for f

f =( 1+i )c −1
f =( 1+0.0075 )3−1
f =1.022669172−1
f =0.022669172

Next calculate for the present value

1−( 1+f )−n
P=C [ f ]
1−( 1+0.022669172 )−24
P=1460 [ 0.022669172 ]
P=1460 [ 18.35428165 ]
P= ₱ 26,797.25

Thus, the present value will be ₱ 26,797.25

Example 4: Lazarus bought a rolling store and agreed to pay ₱ 7,900 of each month for
1 year. What is the equivalent cash price of the rolling store if the interest
rate is 12 % compounded semiannually?

Solution:
Given: C=₱ 7,900 r =0.12 t=1 m=2 k =12
r 0.12 m 2 1
n=t k =1 (12 ) =12 i= = =0.01 c= = =
m 12 k 12 6

First is to compute for f

c
f =( 1+i ) −1
1
6
f =( 1+0.01 ) −1
f =1.001659764−1
f =0.001659764
 Next calculate for the present value

1−( 1+f )−n

P=C [ f ]
1−( 1+0.001659764 )−12
P=7,900 [ 0.001659764 ]
P=7,900 [ 11.87153459 ]
P= ₱ 93,785.13

Thus, the present value will be ₱ 93,785.13.

ACTIVITY 2. Answer the given problem and show your complete solution.
How much must be deposited now, at 15% compounded bimonthly, to yield an
annuity payment of Php8,000 at the beginning of every three months for 4 years.

C. Computing the Cash Flow/Periodic Payment

Example 5: French Fries Food Inc. wishes to accumulate ₱ 500,000during the next 24
months in order to open a second location. What constant amount should it
pay a money market savings account with an investment deals at the end of
each month in order to attain its savings objectives. The planning
assumption is that the account will earn 10 % compounded semiannually.

Solution:
 Given: F=₱ 500,000 r =0.10 t=2 m=2 k =12
r 0.10 m 2 1
n=t k =2 ( 12 )=24 i= = =0.05 c= = =
m 2 k 12 6

First is to compute for f

f =( 1+i )c −1
1
6
f =( 1+0.05 ) −1
f =1.008164846−1
f =0.008164846

Next calculate the cash flow given the future value

Ff
C=
( 1+ f )n−1
(500,000)(0.008164846)
C=
(1+ 0.008164846 )24−1
4,082.423026
C=
0.21550625
C=₱ 18,943.41

Thus, the French Fries Food Inc. should make monthly contributions of
₱ 18,943.41 into the account.
Example 6: An interest-bearing note for ₱75,000 requires payments at the end of each
quarter for four years. If the interest rate on the note is 15% compounded
monthly, what is the size of each payment?

Solution:
Given: P= ₱ 75,000 r =0.15 t=4 m=12 k =4
r 0.15 m 12
n=t k =4 ( 4 )=16 i= = =0.0125 c= = =3
m 12 k 4

First is to compute for f

f =( 1+i )c −1
1
6
f =( 1+0.0125 ) −1
f =1.037970703−1
f =0.037970703

Next calculate the cash flow given the present value

 Pf
C=
1−( 1+f )−n
(75,000)(0.037970703)
C= −16
1−( 1+0.037970703 )
2,847.802725
C=
0.44914351
C=₱ 6,340.52

Thus, each quarterly payment on the note should be ₱6,340.52.

ACTIVITY 3. Answer the given problem and show your complete solution.

Elijah’s Shop wants to start a fund to accumulate half of the expected ₱ 600,000 cost
of facility expansion in 8 years. What semiannually account must be paid into the fund
earning 6 % compounded quarterly in order to reach the target?

LESSON 5 DEFERRED ANNUITY (4

Learning Competencies: At the end of the lesson, the learner should be able to
1. Calculates the fair market value of a cash flow stream that includes an annuity.
2. Calculates the present value and period of deferral of a deferred annuity.

A deferred annuity is an insurance contract designed for long-term savings. Unlike

an immediate annuity, which starts annual or monthly payments almost immediately,
investors can delay payments from a deferred annuity indefinitely. During that time, any
earnings in the account are tax-deferred.

5.1 UNDERSTANDING DEFERRED ANNUITY

A. How it Works?

The term “annuity” refers to a series of

payments. Traditionally, annuities provide
lifetime income (retirement income, for example).
When you use a deferred annuity, you don't
necessarily ever have to turn the money into
a systematic stream of income. Instead, you can
simply make withdrawals as needed, take it all out in one lump-sum, or transfer the
assets to a different annuity or account.
Ultimately, a deferred annuity allows you to keep control over the money and
keep your options open instead of irrevocably handing everything over to the insurance
company in exchange for lifetime payments.
When used in that way, a deferred annuity is basically an account that  also happens to
have some of the features of an annuity: certain tax characteristics, and possibly
guarantees made by an insurance company (including the possibility of a death benefit).
If you eventually decide to annuitize, you can select a payment option from your
insurance company’s list of choices. For example, you might choose to receive income
that covers your lifetime only, or you might prefer to have payments continue for your
lifetime or your spouse’s lifetime (whichever is longer).
The term “defer” refers to the fact that you wait to annuitize or take action on the
annuity. Contrast that approach with an immediate annuity, which starts making
payments more or less immediately after you purchase and fund the annuity.
Once you start taking payments from an immediate annuity, it’s difficult or
impossible to stop the process and get your money back. But with a deferred
annuity, you wait—possibly forever—to annuitize your contract.

B. Basic Concepts on Deferred Annuity

• A deferred annuity is an annuity whose first payment is to start at some future

date.
• Computing Deferred Annuity involves three (3) cases.
Case 1: If the periodic payment is made on the succeeding year, multiply the
number of deferred years by m.

Case 2: If the periodic payment is due at the end of the deferment years,
then multiply the number of deferred years by m and subtract 1.
d=m(deferred years) – 1

Case 3: 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
 For d = multiply the deferment years by m then subtract 1
 For n = multiply the difference by m then add 1

C. Deferred Annuity Formula

 1−( 1+i )−n
P=C [ i ](1+ i)−d

where:
• P=¿ present value of deferred annuity
• C=¿ cash flow or size of periodic payment of the deferred annuity
r
• i=¿ periodic interest rate for conversion period
m ( )
• m=¿ Number of conversion or payment interval per year
• t=¿time period (term) of the loan or investment
• n=¿ total number of payments (tm)
• r =¿ nominal interest rate per compounding period
• d 1=¿ deferred periods
• d=¿ number of deferred period (m d 1)

5.2 COMPUTING DEFERRED ANNUITY

A. Case 1 If the periodic payment is made on the succeeding year, multiply the
number of deferred years by m.

Example 1: Find the present value of a deferred annuity of ₱ 1,000 every end of six
months for 8 years that is deferred for 5 years if money is worth 10 %
compounded semi-annually.

Solution:
Given: C=₱ 1000 r =0.10 t=8 m=2 d 1=5
r 0.10
n=t m=8 ( 2 ) =16 i= = =0.05 d=md 1=2 ( 5 )=10
m 2
1−( 1+i )−n
P=C [ i ](1+ i)−d

1−( 1+0.05 )−16

P=1000 [ 0.05 ]
(1+ 0.05)−10

P=1000 ( 10.83776956 ) ( 0.6139132535 )

P=6,653.45

Thus, the present value is ₱ 6,653.45

Example 2: What is the present value of a deferred annuity of ₱ 800 quarterly for 6
years but the payment starts 3years after with a rate of 7 % compounded
quarterly?

Solution:
Given: C=₱ 800 r =0. 07 t=6 m=4 d 1=3
r 0.07
n=t m=6 ( 4 ) =24 i= = =0.0175 d=md 1=4 ( 3 ) =12
m 4
1−( 1+i )−n
P=C [ i ]
(1+ i)−d

1− ( 1+ 0.0175 )−24
P=800 [ 0.0175 ](1+0.0175)−12

P=800 ( 19.46068565 ) 0.8120578805 ¿

P=12,642.56

Thus, the present value is ₱ 12,642.56.

ACTIVITY 1. Answer the given problem and show your complete solution.

Ivan is setting up a fund to help finance his son’s college education. He wants his son
to be able to withdraw ₱ 40,000 at the beginning of every three months for 2 years
starting after 6 years. If the fund can earn 8 % compounded quarterly, what single
amount contributed today will provide for the payments?

B. Case 2: If the periodic payment is due at the end of the deferment years, then
multiply the number of deferred years by m and subtract 1.
 d=m(deferred years) – 1

Example 3: A credit card company offers a deferred payment option for purchasing
equipment. The manager of a factory plans to buy a piece of machinery
through monthly payments of ₱ 8,000for one year, but the payments starts
at the end of 3 months. How much is the cash price of the machinery if the
interest is 8 % compounded monthly?

Solution:
3 1
Given: C=₱ 8000 r =0. 08t =1 m=12 d 1= =
12 4
r 0.08 1 1
n=t m=1 ( 12 )=12 i= = =
m 12 150
d=m d 1−1=12
4
−1=2 ()
1−( 1+i )−n
P=C [ i ](1+ i)−d

−12
1
P=8000
1− 1+

[
1
150

150
( )
](
P=8000 ( 11.4957818 ) (0.9867988246)
1+
1
150
−2

)
P=90,752.19

Thus, the cash price of the machinery is ₱ 90,752.19.

Example 4: What is the cash price of a TV Set if the installment payment is ₱ 5,500
every six months, with the first payment at the end of 3 years for 7 years at
1.7 % compounded semi-annually?

Solution:
Given: C=₱ 5500 r =0. 017 t=7 m=2 d 1=3
r 0.017
n=t m=7 ( 2 ) =14 i= = =0.0085 d=m d 1−1=2 ( 3 )−1=5
m 2

1−( 1+i )−n

P=C [ i ](1+ i)−d

1−( 1+0 .0085 )−14

P=5500 [ 0.0085 ]
( 1+0.0085 )−5
P=5500 ( 13.14654193 ) (0.9585626155)
P=69,309.81
 Thus, the cash price of a TV set is ₱ 69,309.81

ACTIVITY 2. Answer the given problem and show your complete solution.

Find the present value of an annuity if the first monthly payment of ₱ 6,500 is made at
the end of 4years for9 years. Money is worth 13.6 % compounded monthly.

C. Case 3: 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

Example 5:If money is worth 10% compounded semi-annually, find the present
value of ₱12,500 annuity every 6 months, the first of which is due at
the end of 2 years and the last is at the end of 7 years.

Solution:
Given: C=₱ 12,500 r =0.10 t =7−2=5 m=2 d 1=2
r 0.10
n=t m+1=5 ( 2 ) +1=11 i= = =0.05
m 2
 d=md 1−1=2 ( 2 ) −1=3

1−( 1+i )−n

P=C [ i ]
(1+ i)−d

1−( 1+0.05 )−11

P=12500 [ 0.05 ]
( 1+0.05 )−3
P=12500 ( 8.306414218 ) ( 0.8638375985)
P=89,692.41

Thus, the present value of the money is ₱ 89,692.41

Example 6: Find the present value of man’s pension of ₱13,000 payable

monthly, the first due is at the end of 1 year, and the last at the end
of 5 years, if money is worth 6% compounded monthly.

Solution:
Given: C=₱ 13,000 r =0. 06 t=5−1=4 m=12 d 1=1
r 0.06
n=t m+1=4 ( 12 ) +1=49 i= = =0.005
m 12
d=md 1−1=12 ( 1 )−1=11

1−( 1+i )−n

P=C [ i ]
(1+ i)−d

1−( 1+0.005 )−49

P=13000 [ 0.005 ]
( 1+0.005 )−11
P=13000 (43.36350028)(0.9466148664)
P=533,630.94

Thus, the present value of the money is ₱ 533,630.94

ACTIVITY 3. Answer the given problem and show your complete solution.

If money is worth 10.8 % compounded quarterly, find the present value of

₱ 1,790 annuity every 3 months, the first of which is due at the end of 3 years
and the last at the end of 8 years.
 SUMMARY AND KEY TAKEAWAYS:

 By using a deferred annuity, you keep several options available, including:

 Adding funds to the account to increase the annuity’s value
 Taking lump-sum withdrawals as needed (for significant expenses,
for example)
 Transferring assets to a different financial institution
 Cashing out the annuity
 Converting the annuity into a stream of payments at a later date
 Leaving the assets to earn interest over time

 From the perspective of an investor, deferred annuities are mainly useful for
the purpose of tax deferral of earnings because of a lack of restrictions on the
amount of its annual investment coupled with the guarantee of the lifelong source
of income. However, one of the major drawbacks of an annuity is that its gains
are taxed at the ordinary income tax rate which is higher than the long-
term capital gains tax rate.

SUMMARY AND KEY TAKEAWAYS:

 General Annuity is an annuity where the payment interval is not the same as the
interest conversion period.
 Fees charged for annuities include the additional expenses of insuring the death
benefit, living benefits, and other guarantees — this is on top of the expense
ratios of any underlying investment funds. Also look at annual contract charges
and surrender charges the issuing insurance company may impose on
withdrawals taken during the initial years of the contract.