General Mathematics Week 3

Guide
Question:
 Annuity
It is a series of equal periodic
payments or deposits where the
interest of each payment is
compounded.
After the birth of a child, parents
started regular payments to meet
their child’s future college expenses.
A company decided to set aside a
certain amount each year for the
purchase of new equipment 10 years
from the current date.
 Amount of Annuity
It is denoted by 𝑆 which refers to the
sum of the compound amounts or the
future values of each payment to be made
during the entire term of the annuity.
 Present Value of an Annuity
It is denoted by 𝐴 which refers to the sum of
present values of all the payments to be made
during the entire term of an annuity.
 Regular Payment
It is denoted by 𝑅 which refers
to the amount of each payment.
Payment Interval
It refers to length of time
between each payment.
Term of the Annuity
It is denoted by 𝑡 which refers
to the time from the beginning
and up to the last payment.
 Simple Annuity
It is an annuity where payment
intervals coincide with the
interest conversion periods.
 “Mr. Cruz enrolls his daughter in the College
Education Plan. He pays ₱2,100 at the end of
each three months. In turn, the CEP deposits
the payments in a bank which pays at 12%
interest rate compounded quarterly.”
 General Annuity
It is an annuity where payment
intervals do not coincide with the
interest conversion period.
 “Mr. Cruz enrolls his daughter in the College
Education Plan. He pays ₱2,100 at the end of
each three months. In turn, the CEP deposits
the payments in a bank which pays at 12%
interest rate compounded monthly.”
 Annuity Certain
It is an annuity with definite
beginning and ending dates.
“On his daughter’s grade school graduation, Mr.
Cruz enrolled her in the College Education Plan
(CEP). He pays ₱2,100 at the end of each three
months for five (5) years. In turn, the CEP
deposits the payments in a bank which pays at
15% interest rate compounded quarterly.”
 Perpetuity
It is an annuity with definite
beginning date but indefinite
ending date.
 “A philanthropist donated ₱1,500,000 to a
secondary school scholarship fund. The donation
was invested in a bank which pays interest
monthly, and the recipient of the scholarship will
receive a regular monthly allowance of lesser
amount.”
 Contingent Annuity
It is an annuity with no fixed terms. In
this annuity, payments extend over an
indefinite length of time.
 “A businessman started to have a death
insurance plan which he pays ₱3,000
monthly. The Insurance Company deposits
all the payments in a bank that pays 10%
interest rate compounded bimonthly.”
 Ordinary Annuity
It is an annuity where payments
are made at the end of each
payment interval.
• Monthly Telephone Bills
• Monthly Electric Bills
• House Rentals
 Annuity Due
It is an annuity where payments
are made at the beginning of
each payment intervals.
 • Insurance Payments
• Health-care Premiums
• School Bus Fees
 Deferred Annuity
It is an annuity where payments are
made at the end of each payment
interval, with the first payment made
on a later date.
• Monthly car plans where the first
payment is made after 6 months
• House and lot installments with
the first payment made after two
(2) years.
Ordinary Annuity
& Annuity Certain
are the emphasis
on this subject.
 Ordinary Annuity
It refers to a sequence of periodic
payments which are thought of as
occurring at the ends of
corresponding payment intervals.
 Ordinary Annuity
The regular payment or the periodic payment
is denoted by 𝑹, 𝑴 for the time between two
successive payment dates, and 𝒕 for the time
from the beginning of the first payment
interval to the end of the last one.
 Since 𝑆 represents the Future Value of an
Annuity which is the sum of all the compound
amounts on hands at the end of the term, thus;

𝑀𝑡 𝑴 𝑴𝒕
𝑖 𝑀 𝒊
𝐹 =𝑃 1+
𝑀 𝑺=𝑨 𝟏+
𝑴
𝒊𝑴
“You decided to invest your money for future
use. You deposited ₱1,500 at the end of
every 6 months. You had an agreement with
the company that each of your deposit will
earn interest at 6% annual rate compounded
semi-annually for three (3) years.
𝑹 1500 1500 1500 1500 1500 1500

1 2 3 4 5 6
𝟎
𝟎. 𝟎𝟔
𝑭𝟏 = 𝟏𝟓𝟎𝟎 𝟏 +
𝟐
𝟏
𝟎. 𝟎𝟔
𝑭𝟐 = 𝟏𝟓𝟎𝟎 𝟏 +
𝟐
𝟐
𝟎. 𝟎𝟔
𝑭𝟑 = 𝟏𝟓𝟎𝟎 𝟏 +
𝟐
𝟑
𝟎. 𝟎𝟔
𝑭𝟒 = 𝟏𝟓𝟎𝟎 𝟏 +
𝟐
𝟒
𝟎. 𝟎𝟔
𝑭𝟓 = 𝟏𝟓𝟎𝟎 𝟏 +
𝟐
𝟓
𝟎. 𝟎𝟔
𝑭𝟔 = 𝟏𝟓𝟎𝟎 𝟏 +
𝟐
From the given illustration, we can derive the formula
in computing for the Future Value 𝑆 of the Annuity:

𝑺 = 𝑭𝟏 + 𝑭𝟐 + 𝑭𝟑 + 𝑭𝟒 + 𝑭𝟓 + 𝑭𝟔

𝟎 𝟏 𝟐
𝟎. 𝟎𝟔 𝟎. 𝟎𝟔 𝟎. 𝟎𝟔
= 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 +
𝟐 𝟐 𝟐
𝟑 𝟒 𝟓
𝟎. 𝟎𝟔 𝟎. 𝟎𝟔 𝟎. 𝟎𝟔
+ 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 +
𝟐 𝟐 𝟐
 𝟎 𝟏 𝟐
𝟎. 𝟎𝟔 𝟎. 𝟎𝟔 𝟎. 𝟎𝟔
= 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 +
𝟐 𝟐 𝟐
𝟑 𝟒 𝟓
𝟎. 𝟎𝟔 𝟎. 𝟎𝟔 𝟎. 𝟎𝟔
+ 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 + + 𝟏𝟓𝟎𝟎 𝟏 +
𝟐 𝟐 𝟐

𝑴 𝟏 𝑴 𝟐 𝑴 𝟑 𝑴 𝟒
𝒊 𝒊 𝒊 𝒊
=𝑹+𝑹 𝟏+ +𝑹 𝟏+ +𝑹 𝟏+ +𝑹 𝟏+
𝑴 𝑴 𝑴 𝑴
𝑴 𝟓 𝑴 𝑴𝒕−𝟐 𝑴 𝑴𝒕−𝟏
𝒊 𝒊 𝒊
+𝑹 𝟏+ + ⋯+ 𝑹 𝟏 + +𝑹 𝟏+
𝑴 𝑴 𝑴
 𝒊𝑴
Let 𝑗 = and 𝑛 = 𝑀𝑡
𝑴
𝑴 𝟏 𝑴 𝟐 𝑴 𝟑 𝑴 𝟒
𝒊 𝒊 𝒊 𝒊
=𝑹+𝑹 𝟏+ +𝑹 𝟏+ +𝑹 𝟏+ +𝑹 𝟏+
𝑴 𝑴 𝑴 𝑴
𝑴 𝟓 𝑴 𝑴𝒕−𝟐 𝑴 𝑴𝒕−𝟏
𝒊 𝒊 𝒊
+𝑹 𝟏+ + ⋯+𝑹 𝟏 + +𝑹 𝟏+
𝑴 𝑴 𝑴

=𝑹+𝑹 𝟏+𝒋 𝟏+𝑹 𝟏+𝒋 𝟐+𝑹 𝟏+𝒋 𝟑+𝑹 𝟏+𝒋 𝟒

+ 𝑹 𝟏 + 𝒋 𝟓 + ⋯ + 𝑹 𝟏 + 𝒋 𝒏−𝟐 + 𝑹 𝟏 + 𝒋 𝒏−𝟏
 =𝑹+𝑹 𝟏+𝒋 𝟏+𝑹 𝟏+𝒋 𝟐+𝑹 𝟏+𝒋 𝟑+𝑹 𝟏+𝒋 𝟒

+ 𝑹 𝟏 + 𝒋 𝟓 + ⋯ + 𝑹 𝟏 + 𝒋 𝒏−𝟐 + 𝑹 𝟏 + 𝒋 𝒏−𝟏
Observe that the accumulated amounts formed a Geometric Sequence, where
first term is 𝒂𝟏 = 𝑹 and the common ratio is 𝒓 = 𝟏 + 𝒋 . Thus, using the formula
for the sum of first 𝑛 terms of a geometric sequence, we have:

𝒂𝟏 𝒓𝒏 − 𝟏
𝑺=
𝒓−𝟏
Substituting the values of 𝑎1 and 𝑟:

𝑹 𝟏+𝒋 𝒏−𝟏
𝑺=
𝟏+𝒋−𝟏
Future Value 𝑺 of an Annuity
𝑴𝒕
𝑴
𝒊
𝑹 𝟏+ −𝟏
𝑴
𝑺= 𝑴
𝒊
𝑴
𝒊𝑴
Since 𝐴 represents the Present Value of an Annuity which is the sum
of all the present values of the payments made the whole term;

𝑀𝑡 𝑴 −𝑴𝒕
𝑖 𝑀 𝒊
𝑆 =𝐴 1+
𝑀 𝑨=𝑺 𝟏+
𝑴
𝒊𝑴
Since the Future Value S of an Annuity is also expressed as:

𝑴𝒕
𝒊 𝑴
𝑹 𝟏+ 𝑴 −𝟏
𝑺= 𝑴
𝒊
𝑴

We substitute S to obtain:
𝑴𝒕 −𝑴𝒕
𝑴 𝑴
𝒊 𝒊
𝑹 𝟏+ −𝟏 𝟏+
𝑴 𝑴
𝑨= 𝑴
𝒊
𝑴
 𝑴𝒕 −𝑴𝒕
𝒊 𝑴 𝒊 𝑴
𝑹 𝟏+ 𝑴 −𝟏 𝟏+ 𝑴
𝑨= 𝑴
𝒊
𝑴

Simplifying the equation, we can obtain:

−𝑴𝒕
𝑴
𝒊
𝑹 𝟏− 𝟏+ 𝑴
𝑨= 𝑴
𝒊
𝑴
Present Value 𝑨 of an Annuity
−𝑴𝒕
𝑴
𝒊
𝑹 𝟏− 𝟏+
𝑴
𝑨= 𝑴
𝒊
𝑴
𝒊𝑴
Periodic Payment 𝑹 of an Annuity
𝑴 𝑴
𝒊 𝒊
𝑨 𝑺
𝑴 𝑴
𝑹= −𝑴𝒕 𝑹= 𝑴𝒕
𝒊 𝑴 𝒊 𝑴
𝟏− 𝟏+ 𝑴 𝟏+ 𝑴 −𝟏

𝒊𝑴
Number of Payments & Term of an Annuity
𝑨𝒊 𝑴 𝑨𝒊 𝑴
−𝐥𝐨𝐠 𝟏 − 𝑴𝑹 −𝐥𝐨𝐠 𝟏 − 𝑴𝑹
𝒏= 𝒕=
𝒊 𝑴 𝒊 𝑴
𝐥𝐨𝐠 𝟏 + 𝑴 𝐥𝐨𝐠 𝟏 +
𝑴 𝑴

𝒊𝑴
Number of Payments & Term of an Annuity
𝑺𝒊 𝑴 𝑺𝒊 𝑴
𝐥𝐨𝐠 𝑴𝑹 + 𝟏 𝐥𝐨𝐠 𝑴𝑹 + 𝟏
𝒏= 𝒕=
𝒊 𝑴 𝒊 𝑴
𝐥𝐨𝐠 𝟏 + 𝑴 𝐥𝐨𝐠 𝟏 +
𝑴 𝑴

𝒊𝑴
“In order to save for her high school graduation,
May decided to save ₱200 at the end of each
month. If the bank pays 0.025% interest rate
compounded monthly, how much would her
money will be at the end of six (6) years?”
Given: 𝑅 = 200 𝑖 𝑀
= 0.0025
𝑀 = 12 𝑡=6
Find: Future Value 𝑆 of the Annuity
Formula: 𝒊 𝑴
𝑴𝒕
𝑹 𝟏+ 𝑴 −𝟏
𝑺= 𝑴
𝒊
𝑴
 Solution: 𝟎. 𝟎𝟎𝟐𝟓 𝟏𝟐 𝟔
𝟐𝟎𝟎 𝟏 + −𝟏
𝟏𝟐
𝑺=
𝟎. 𝟎𝟎𝟐𝟓
𝟏𝟐
𝑺 = 𝟏𝟒 𝟓𝟎𝟕. 𝟎𝟐
Conclusion:

₱
 “Suppose you would like to know the
present value of your monthly deposit of
₱3,000 at the end of six (6) months when
interest is at 9% compounded monthly.
How much would it be?”
Given: 𝑅 = 3000 𝑖 𝑀
= 0.09
𝑀 = 12 𝑚=6
Find: Present Value 𝐴 of the Annuity
Formula: 𝒊 𝑴
−𝑴𝒕
𝑹 𝟏− 𝟏+ 𝑴
𝑨= 𝑴
𝒊
𝑴
 𝟔
Solution: 𝟎. 𝟎𝟗 − 𝟏𝟐
𝟏𝟐
𝟑𝟎𝟎𝟎 𝟏 − 𝟏 +
𝑨= 𝟏𝟐
𝟎. 𝟎𝟗
𝟏𝟐
𝑨 = 𝟏𝟕 𝟓𝟑𝟔. 𝟕𝟗

Conclusion:
₱
“A philanthropist donated ₱320,000 to his Alma
Mater by creating a professional chair in honor
of his family. The said money was deposited by
the school in a fund earning 15% interest
compounded monthly for five (5) years, with an
agreement that the recipient of the chair gets a
monthly honorarium for five (5) years. How much
is the monthly honorarium?”
Given: 𝐴 = 320 000 𝑖 𝑀
= 0.15
𝑀 = 12 𝑡=5
Find: Periodic Payment 𝑅
𝑴
Formula: 𝑨
𝒊
𝑴
𝑹= −𝑴𝒕
𝒊 𝑴
𝟏− 𝟏+
𝑴
 𝟎. 𝟏𝟓
Solution: 𝟑𝟐𝟎 𝟎𝟎𝟎 𝟏𝟐
𝑹= − 𝟏𝟐 𝟓
𝟎. 𝟏𝟓
𝟏− 𝟏+
𝟏𝟐

𝑹 = 𝟕 𝟔𝟏𝟔. 𝟕𝟖

Conclusion:
₱
 How many equal payments of ₱500 at
the end of each month will be required
to accumulate ₱200,000 at 12%
interest rate compounded monthly?”
Given: 𝑆 = 200 000 𝑖 𝑀
= 0.12
𝑅 = 500 𝑀 = 12
Find: Number of Equal Payments 𝑛
Formula: 𝑺𝒊 𝑴
𝐥𝐨𝐠 +𝟏
𝑴𝑹
𝒏=
𝒊 𝑴
𝐥𝐨𝐠 𝟏 +
𝑴
 Solution: 200 000 0.12
log +1
12 500
𝑛=
0.12
log 1 + 12

𝒏 = 𝟏𝟔𝟏. 𝟕𝟒

Conclusion:
₱