General Mathematics - Grade 11

Fair Market Value and Deferred Annuity

I. Introduction

One of the missions of the Department of Education is to inculcate financial literacy

among students and to use the acquired mathematical skills to decide for themselves when
spending hard-earned money.
The series of payments for a loan does not usually start immediately after the release
of the loan proceeds. This timespan between the purchase of an annuity and the first payment
is called period of deferral.
In this Learner’s Packet, you will learn how to find the fair market value of cash flow
that involves annuity and determine which situation or payment scheme offers a higher fair
market value. You will also learn how to calculate the present value and period of deferral of
a deferred annuity.

II. Learning Objectives

At the end of this Learner’s Packet, you will be able to:

1. calculate the fair market value of a cash flow stream that includes an annuity
(M11GM-IId-2); and
2. to calculate the present value and period of deferral of a deferred annuity
(M11GM-IId-3).

III. Learning Activities

Lesson 1: Calculating the Fair Market Value of a Cash Flow Stream

that Includes an Annuity

If you apply for a loan or invest your money using staggered payment, or avail an
installment plan when purchasing an appliance there is a need to determine the value of
money at a particular period of time. This particular date is called the focal date, and the single
value equivalent to the cash stream at that date is called fair market value of the cash flow.
If the focal date is at the beginning of the payment term, then you have to calculate
the present value of the cash flow.
 The present value of an annuity refers to how much money would be needed today
to fund a series of future annuity payments.1

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 𝟏 − (𝟏 + 𝒋)−𝒏
𝑷𝑽 = 𝑹 [ ]
𝒋

where:
𝑃𝑉 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑;
𝑚
𝑟 𝑝
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑗 = (1 + 𝑚
) −1
𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝑝 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑚𝑎𝑑𝑒 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

The value of money today or present value of a lump sum or one-time payment can
be computed using the formula:

𝑷𝑽 = 𝑹(𝟏 + 𝒋)−𝒏

where:
𝑃𝑉 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑜𝑛𝑒 − 𝑡𝑖𝑚𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑟
𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝑚 𝑛 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 (𝑚) 𝑡𝑖𝑚𝑒𝑠 𝑦𝑒𝑎𝑟𝑠 (𝑡)

If the focal date is at the end of the payment term, then you have to calculate the future
value of the cash flow.
 The future value of an annuity is a way of calculating how much money a series of
payments will be worth at a certain point in the future.2
(1 + 𝑗)𝑛 − 1
𝐹𝑉 = 𝑅 [ ]
𝑗

𝐹𝑉 = 𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒 𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑

𝑚
𝑟 𝑝
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑗 = (1 + 𝑚
) −1
𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝑝 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑚𝑎𝑑𝑒 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

The value of money after a certain period of time or future value of a lump sum or
one-time payment can be computed using the formula:
𝐹𝑉 = 𝑅(1 + 𝑗)𝑛
where:
𝐹𝑉 = 𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒 𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑜𝑛𝑒 − 𝑡𝑖𝑚𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑟
𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝑚 𝑛 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 (𝑚) 𝑡𝑖𝑚𝑒𝑠 𝑦𝑒𝑎𝑟𝑠 (𝑡)

Illustrative Example 1. JRV Motorcycle Store offers two payment schemes for their top of the
line motorcycle. The first scheme offers a P50,000 down payment and a lump sum payment
of P200.000 after 4 years while the second payment scheme offers P40,000 down payment
and P26,250 every six months for four years. Find the fair market value of each scheme at the
start and end of the payment term if the interest rate is 5% compounded annually.

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 First payment scheme Second payment scheme
P50,000 down payment P40,000 down payment
P200,000 after 4 years P26,250 every six months for 4 years

Fair market value at the START of the term

First payment scheme: Since the focal date is at the beginning of the term (today) or 𝑡 = 0,
then the present value of P50,000 down payment is still P50,000 at 5% interest rate
compounded annually. To convince you, let’s have a computation.
Given:
𝑅 = 50,000 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟(𝑚) = 1 𝑡=0
𝑟 0.05
𝑟 = 0.05 𝑛 = 𝑚𝑡 = 1(0) = 0 𝑗=𝑚= 1
= 0.05

Solution:
Let 𝑃𝑉1 be the present value of the P50,000 down payment.
The formula for the present value of one-time payment is 𝑃𝑉1 = 𝑅(1 + 𝑗)−𝑛 .

𝑃𝑉1 = 𝑅(1 + 𝑗)−𝑛 ⥤ 𝑃𝑉1 = 50000(1 + 0.05)0 ⥤ 𝑷𝑽𝟏 = 𝟓𝟎, 𝟎𝟎𝟎

To determine the present value of lump sum payment of P200,000 payable after 4 years:
Given:
𝑅 = 200,000 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟(𝑚) = 1 𝑡=4
𝑟 0.05
𝑛 = 𝑚𝑡 = 1(4) = 4 𝑟 = 0.05 𝑗=𝑚= 1
= 0.05

Solution:
Let 𝑃𝑉2 be the present value of lump sum payment of P200,000 payable after 4
years.
𝑃𝑉2 = 𝑅(1 + 𝑗)−𝑛 ⥤ 𝑃𝑉2 = 200,000(1 + 0.05)−4 ⥤ 𝑷𝑽𝟐 = 𝟏𝟔𝟒, 𝟓𝟒𝟎. 𝟒𝟗

Therefore, the fair market value of the first payment scheme at the beginning of the term
is:
𝐹𝑀𝑉 = 𝑃𝑉1 + 𝑃𝑉2
𝐹𝑀𝑉 = 50,000 + 164,540.49
𝑭𝑴𝑽 = 𝟐𝟏𝟒, 𝟓𝟒𝟎. 𝟒𝟗

Second payment scheme: Just like the first, since the focal date is at the beginning of the
term (today) or 𝑡 = 0, then the present value of P40,000 down payment is still P40,000.

Given:
𝑟 0.05
𝑅 = 40,000 𝑛 = 𝑚𝑡 = 1(0) = 0 𝑗=𝑚= 1
= 0.05

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Solution:
Let 𝑃𝑉1 be the present value of the P40,000 down payment.

𝑃𝑉1 = 𝑅(1 + 𝑗)−𝑛 ⥤ 𝑃𝑉1 = 40000(1 + 0.05)0 ⥤ 𝑷𝑽𝟏 = 𝟒𝟎, 𝟎𝟎𝟎

To determine the present value of an annuity with regular payment of P26,250 every
six months for 4 years at 5% interest compounded annually we shall use the Present Value
formula for regular payments.
1 − (1 + 𝑗)−𝑛
𝑃𝑉2 = 𝑅 [ ]
𝑗

But since the payment interval is not equal to interest interval, let us first convert the
interest interval per time period 𝒋 to the appropriate rate.
𝑚 1
𝑟 𝑝 0.05 2
𝑗 = (1 + ) − 1 ⥤ 𝑗 = (1 + ) −1 ⥤ 𝑗 = 0.02470
𝑚 1

Let 𝑃𝑉2 be the present value of P26,250 regular payment every 6 months or twice
(2) a year.

Given:

𝑅 = 26,250 𝑛𝑜. 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 (𝑝) 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 2 𝑡=4 𝑛 = (𝑝)(𝑡) = 2(4) = 8

Solution:

1 − (1 + 𝑗)−𝑛 1 − (1 + 0.02470)−8
𝑃𝑉2 = 𝑅 [ ] ⥤ 𝑃𝑉2 = 26,250 [ ]
𝑗 0.02470

⥤ 𝑃𝑉2 = 𝟏𝟖𝟖, 𝟒𝟓𝟕. 𝟎𝟗

Therefore, the fair market value of the second payment scheme at the beginning of
the term is:
𝐹𝑀𝑉 = 𝑃𝑉1 + 𝑃𝑉2
𝐹𝑀𝑉 = 40,000 + 188,457.09
𝑭𝑴𝑽 = 𝟐𝟐𝟖, 𝟒𝟓𝟕. 𝟎𝟗
Thus, the second payment scheme has a greater fair market value at the beginning
of the payment term.

The difference between fair market value of the second and first payment schemes
is:
𝟐𝟐𝟖, 𝟒𝟓𝟕. 𝟎𝟗 − 𝟐𝟏𝟒, 𝟓𝟒𝟎. 𝟒𝟗 = 𝟏𝟑, 𝟗𝟏𝟕. 𝟎𝟎

Fair market value at the END of the term

First payment scheme: Since the focal date is at the end of the term (4 years from now) or
𝑡 = 4 then, the future value of P50,000 down payment can be calculated using the future value
formula for one-time payment.
𝐹𝑉1 = 𝑅(1 + 𝑗)𝑛
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Given:
𝑟 0.05
𝑅 = 50,000 𝑛 = 𝑚𝑡 = 1(4) = 4 𝑗=𝑚= 1
= 0.05

Solution:
Let 𝐹𝑉1 be the future value of the P50,000 down payment after 4 years at 5% interest
rate compounded annually.
𝐹𝑉1 = 𝑅(1 + 𝑗)𝑛 ⥤ 𝐹𝑉1 = 50000(1 + 0.05)4 ⥤ 𝑭𝑽𝟏 = 𝟔𝟎, 𝟕𝟕𝟓. 𝟑𝟏
The future value of P200.000 is still P200,000 because the payment is to be done 4
years from now. Therefore, the fair market value of the first payment scheme at the END of
the term is:
𝐹𝑀𝑉 = 60,775.31 + 200,000
𝑭𝑴𝑽 = 𝟐𝟔𝟎, 𝟕𝟕𝟓. 𝟑𝟏

Second payment scheme: Since the focal date is at the end of the term (4 years from
now) or 𝑡 = 4 then, the future value of P40,000 down payment can be calculated using the
future value formula for one-time payment.
𝐹𝑉1 = 𝑅(1 + 𝑗)𝑛

Given:
𝑟 0.05
𝑅 = 40,000 𝑛 = 𝑚𝑡 = 1(4) = 4 𝑗=𝑚= 1
= 0.05

Solution:
𝐹𝑉1 = 𝑅(1 + 𝑗)𝑛 ⥤ 𝐹𝑉1 = 40000(1 + 0.05)4 ⥤ 𝑭𝑽𝟏 = 𝟒𝟖, 𝟔𝟐𝟎. 𝟐𝟓
Let us determine the future value of an annuity with regular payment of P26,250 every
six months for 4 years at 5% interest compounded annually using the formula:
(1 + 𝑗)𝑛 − 1
𝐹𝑉 = 𝑅 [ ]
𝑗

Given:

𝑅 = 26,250 𝑛𝑜. 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 (𝑝) 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 2 𝑡 = 4 𝑦𝑒𝑎𝑟𝑠

𝑛 = (𝑝)(𝑡) = 2(4) = 8 𝑟 = 0.05 𝑚=1

The appropriate interest rate was previously converted as 𝑗 = 0.02470, since the
number of payments (p) per year is not equal to interest interval (m).

Solution:

Let 𝐹𝑉2 be the future value of the P26,250 annuity every 6 months for 4 years at 5%
interest compounded annually

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 (1 + 𝑗)𝑛 − 1 (1 + 0.02470)8 − 1
𝐹𝑉2 = 𝑅 [ ] ⥤ 𝐹𝑉2 = 26,250 [ ] ⥤ 𝑭𝑽𝟐 = 𝟐𝟐𝟗, 𝟎𝟕𝟗. 𝟓𝟖
𝑗 0.02470

The fair market value of the second payment scheme at the END of the term is:
𝐹𝑀𝑉 = 48,620.25 + 229,079.58
𝑭𝑴𝑽 = 𝟐𝟕𝟕, 𝟔𝟗𝟗. 𝟖𝟑

Still the second payment scheme has greater fair market value. Therefore, it is
advisable to choose the first payment scheme if you are going to buy that top of the line
motorcycle that is, if you have P200,000 available fund after 4 years.

Illustrative Example 2. A land owner plans to sell his estate. Two individuals expressed their
intent to buy the said estate. Mr. Velasco offered 1.5 million pesos payable after 6 months and
2 million pesos after 2 years while Mrs. Abengoza offered a down payment of P500,000 plus
Php375,000 every end of 3 months for 2 years. Suppose the money is earning 8%
compounded semi-annually, which offer has a better market value?

Mr. Velasco’s offer Mr. Abengoza’s offer

1.5 million after 6 months P500,000 down payment
2 million after two years P375,000 quarterly for 2 years

If the focal date is today then, compute the present value of each offer.

Fair market value of Mr. Velasco’s offer:

Compute the present value of P1.5 million that is payable after 6 months with interest
rate of 8% compounded semi-annually.

Given:
𝑟 0.08
𝑅 = 1,500,000 𝑟 = 0.08 𝑚=2 𝑗=𝑚= 2
= 0.04
𝑡 = 6 𝑚𝑜𝑛𝑡ℎ𝑠 𝑜𝑟 0.5 𝑦𝑒𝑎𝑟𝑠 𝑛 = (𝑚)(𝑡) = (2)(0.5) = 1

Solution:

𝑃𝑉1 = 𝑅(1 + 𝑗)−𝑛 ⥤ 𝑃𝑉1 = 1,500,000(1 + 0.04)−1 ⥤ 𝑷𝑽𝟏 = 𝟏, 𝟒𝟒𝟐, 𝟑𝟎𝟕. 𝟔𝟗

Compute the present value of P2 million payable after 2 years with interest rate of 8%
compounded semi-annually.

Given:

𝑟 0.08
𝑅 = 2,000,000 𝑟 = 0.08 𝑚=2 𝑗=𝑚= 2
= 0.04
𝑡 = 2 𝑦𝑒𝑎𝑟𝑠 𝑛 = (𝑚)(𝑡) = (2)(2) = 4

Solution:

𝑃𝑉2 = 𝑅(1 + 𝑗)−𝑛 ⥤ 𝑃𝑉2 = 2,000,000(1 + 0.04)−4 ⥤ 𝑷𝑽𝟐 = 𝟏, 𝟕𝟎𝟗, 𝟔𝟎𝟖. 𝟑𝟖

𝐹𝑀𝑉 = 𝑃𝑉1 + 𝑃𝑉2

RO_General Mathematics_Grade 11_Q2_LP 4
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 𝐹𝑀𝑉 = 1,442,307.69 + 1,709,608.38
𝑭𝑴𝑽 = 𝟑, 𝟏𝟓𝟏, 𝟗𝟏𝟔. 𝟎𝟕

Fair market value of Mrs. Abengoza’s offer:

The present value of P500,000 down payment is still P500,000 since 𝑡 = 0. Obviously,
the present value of a down payment is P500,000 because the payment will be made at 𝑡 = 0.

Given:
𝑟 0.08
𝑅 = 500,000 𝑟 = 0.08 𝑚=2 𝑗=𝑚= 2
= 0.04
𝑡 = 0 𝑦𝑒𝑎𝑟𝑠 𝑛 = (𝑚)(𝑡) = (2)(0) = 0

Solution:

𝑃𝑉1 = 𝑅(1 + 𝑗)−𝑛 ⥤ 𝑃𝑉1 = 500,000(1 + 0.04)0 ⥤ 𝑷𝑽𝟏 = 𝟓𝟎𝟎, 𝟎𝟎𝟎

To compute for the present value of an annuity with quarterly payment of P375,000 for 2 years
with 8% interest compounded semi-annually:

Given:
𝑅 = 375,000 𝑝=4 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠 𝑟 = 0.08
𝑚=2 𝑛 = (𝑝)(𝑡) = (4)(2) = 8

Solution:

Since the payment interval (𝑝) is not equal to interest interval(𝑚), convert to appropriate
interest rate (𝑗).
𝑚 2
𝑟 𝑝 0.08 4
𝑗 = (1 + ) − 1 ⥤ 𝑗 = (1 + ) − 1 ⥤ 𝑗 = 0.019804
𝑚 2
Note: In computing for the value of j, please use at least 5 decimal places.

1 − (1 + 𝑗)−𝑛 1 − (1 + 0.019804)−8
𝑃𝑉2 = 𝑅 [ ] ⥤ 𝑃𝑉2 = 375,000 [ ]
𝑗 0.019804

𝑃𝑉2 = 𝟐, 𝟕𝟒𝟗, 𝟑𝟕𝟕. 𝟓𝟓

𝐹𝑀𝑉 = 𝑃𝑉1 + 𝑃𝑉2
𝐹𝑀𝑉 = 500,000 + 2,749,377.55
𝑭𝑴𝑽 = 𝟑, 𝟐𝟒𝟗, 𝟑𝟕𝟕. 𝟓𝟓

Fair market value of Mr. Velasco’s offer: 𝟑, 𝟏𝟓𝟏, 𝟗𝟏𝟔. 𝟎𝟕

Fair market value of Mrs. Abengoza’s offer: 𝟑, 𝟐𝟒𝟗, 𝟑𝟕𝟕. 𝟓𝟓

Therefore, Mrs. Abengoza’s offer has a better fair market value.

KEY TAKEAWAYS:
Computing for the fair market value of a cash flow will help you decide which financial
transaction will give a much higher return or favorable on your part at a particular period of time.

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 ACTIVITY 1:

Compute the fair market value at the end of the payment term of a motorcycle with a
down payment of P5,000 and monthly payment of P2,000 payable for 3 years at 5% interest
compounded monthly.
Answer: _________________________________________________________________

ACTIVITY 2:
______________
Sophia is planning to invest her P200,000 savings into two investment firms. She will
_
invest P100,000 in ABC Investment Corporation. The remaining amount will be invested in
Phil-Asia Investment Co. with regular payment of P25,000 every 3 months for one year. Both
investment firms are offering 5% interest compounded quarterly.

Guide questions:
a. What is the future value of her first investment in ABC Investment Corporation after one
year?
Answer:____________________________________________________________

b. What type of annuity is the investment made in Phil-Asia Investment Corporation? Why?
Answer: ____________________________________________________________

c. What is the future value of her investment in Phil-Asia Investment Corporation?

Answer: ____________________________________________________________

d. Which investment has higher fair market value after one year?
Answer: ____________________________________________________________

ACTIVITY 3:
______________
_ A certain television set is for sale with 2 different payment schemes. The first payment
scheme has regular monthly payment of P5,000 for one year. The second payment scheme
is P15,000 every 3 months also for one year. Assume that the prevailing interest rate is 4%
per annum.

Guide questions:
a. Compare the present value of the 2 payment schemes.
Answer: ____________________________________________________________
____________________________________________________________

b. Compare the future value of the 2 payment schemes.

Answer: ____________________________________________________________
____________________________________________________________

c. Which payment scheme offers a better fair market value? Why?

Answer: ____________________________________________________________
____________________________________________________________

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 Lesson 2: Calculating the Present Value and Period of
Deferral of a Deferred Annuity
The series of payments for a loan does not usually start immediately after the release
of the loan proceeds. This timespan between the purchase of an annuity and the first payment
is called period of deferral. In this Learner’s Packet, you will learn how to calculate the present
value and period of deferral of a deferred annuity.

In here, you will be learning to calculate the present value and period of deferral of a
deferred annuity.
Deferred Annuity – an annuity that does not begin until a given time interval has passed
Period of Deferral – a time between the purchase of an annuity and the start of the payments
for the deferred annuity.3
The present value of a deferred annuity is given by

(𝟏 + 𝐣)−𝐤 − (𝟏 + 𝐣)−(𝐤+𝐧)
𝐏𝐕 = 𝐑 [ ]
𝐣

where:
𝑅 𝑖𝑠 𝑡ℎ𝑒 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑛 𝑖𝑠 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑚𝑎𝑑𝑒 𝑤𝑖𝑡ℎ𝑖𝑛 𝑡ℎ𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑡𝑒𝑟𝑚
𝑘 𝑖𝑠 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑘𝑖𝑝𝑝𝑒𝑑 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑑𝑒𝑓𝑒𝑟𝑟𝑎𝑙

𝑗 𝑖𝑠 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑

𝐼𝑓 𝑡ℎ𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑖𝑠 𝑒𝑞𝑢𝑎𝑙 𝑡𝑜 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙:

𝑟
𝑗=
𝑚

𝐼𝑓 𝑡ℎ𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑖𝑠 𝑛𝑜𝑡 𝑒𝑞𝑢𝑎𝑙 𝑡𝑜 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙:

𝑚
𝑟 𝑝
𝑗 = (1 + ) − 1
𝑚

𝑚 𝑖𝑠 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

𝑝 𝑖𝑠 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

DETERMINING THE PERIOD OF DEFERRAL OF DEFERRED ANNUITY

Illustrative Examples
In the following items, determine the number of skipped payments or period of deferral 𝒌.
1. An annual installment for 10 years, where the first payment is to be made after 4 years.
Answer: The skipped payments or period of deferral is 𝒌 = 𝟑 because the first payment is to
be made on the 4th year
2. a monthly installment for 6 years where the first payment is to be made after 7 months
Answer: The skipped payments or period of deferral is 𝒌 = 𝟔 because the first payment is to
be made on the 7th month.
RO_General Mathematics_Grade 11_Q2_LP 4
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3. a monthly installment for 3 years where the first payment is to be made at the end of 1 year
and 1 month
Answer: The skipped payments or period of deferral is 𝒌 = 𝟏𝟐 because the first payment is
to be made on the 13th month.
4. an annuity payable every 6 months for 10 years, where the first payment is to be made after
2 years
Answer: Since payment should be made every 6 months, there are 𝒌 = 𝟑 skipped payments
or period of deferral because the first payment will only be made on the 24th month or 2nd year.
5. an annuity payable every 3 months for 5 years where the first payment should be made
after 9 months
Answer: Since payment should be made every 3 months then, there will be 𝒌 = 𝟐 skipped
payments before the first payment will be made after 9 months.

DETERMINING THE PRESENT VALUE OF DEFERRED ANNUITY

Illustrative Examples
1. A certain retirement plan offers a 5% interest compounded annually. How much money
must be invested today so that P80,000 annual payout will be enjoyed for 10 years if the first
payout will be made after 5 years?
Solution:
Since the first payout will be made after 5 years then, the period of deferral is 𝒌 = 𝟒. Note that
the payment interval every year 𝒑 = 𝟏 is equal to the compounding interval 𝒎 = 𝟏 then, we
𝑟
shall use 𝑗 = 𝑚.

𝑟 0.05
𝑗= = = 0.05
𝑚 1
Given:
𝑅 = 80,000 𝑘=4 𝑛 = 10 𝑗 = 0.05

(1 + 𝑗)−𝑘 − (1 + 𝑗)−(𝑘+𝑛)
𝑃𝑉 = 𝑅 [ ]
𝑗

(1 + 0.05)−4 − (1 + 0.05)−(4+10)
𝑃𝑉 = 80,000 [ ]
0.05

𝑃𝑉 = 508,215.23
Therefore, P508,215.23 must be invested today to receive an annual payout of
P80,000 for 10 years.
2. Sophia Jureign inherited P800,000 from his wealthy uncle and invested it in a firm that offers
4.5% interest compounded semi-annually. If she wants to receive a monthly payout 10
months from now for 15 years, how much will be her regular payout every month?

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Solution:
Since the payment interval 𝑝 = 12 and the compounding interval 𝑚 = 2 are not equal, to
compute for the appropriate interest per period 𝑗 we shall employ the formula:
𝒓 𝒎
𝒋 = (𝟏 + )𝒑 − 𝟏
𝒎
𝑚 2
𝑟 0.045 12
𝑗 = (1 + 𝑚) 𝑝 − 1 ⥤ 𝑗 = (1 + 2
) −1 ⥤ 𝑗 = 0.003715

Given:
𝑃𝑉 = 800,000 𝑘=9 𝑡 = 15 𝑦𝑒𝑎𝑟𝑠 𝑛 = 12𝑡 = 12(15) = 180

(1 + 𝑗)−𝑘 − (1 + 𝑗)−(𝑘+𝑛)
𝑃𝑉 = 𝑅 [ ]
𝑗

(1 + 0.003715)−9 − (1 + 0.003715)−(9+180)
800,000 = 𝑅 [ ]
0.003715

800,000 = 𝑅(126.785)
800,000 𝑅(126.785)
=
126.785 126.785
𝑹 = 𝟔, 𝟑𝟎𝟗. 𝟖𝟗
Therefore, her monthly payout will be P6,309.89 payable for 15 years.

ACTIVITY 1:

Direction: Determine the period of deferral of each of the following statements.

1. a monthly annuity payable for 5 years; first payment will be made at the end of 6 months
Answer: _______________
2. a semi-annually installment payable for 8 years; first payment will be made after one year
Answer: _______________
3. a quarterly installment payable for 3 years; first payment will be made after 1.5 years
Answer: _______________
4. an annual payment payable for 9 years; first payment will be made 4 years from now
Answer: _______________
5. a quarterly payment for 6 years; first payment will be made 2 and a half years from now
Answer: _______________

RO_General Mathematics_Grade 11_Q2_LP 4

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 ACTIVITY 2:
______________
_ each of the following problems involving deferred annuity.
Solve
1. An old farmer named Mang Jose wants to invest his P250,000 savings in a firm that offers
3.4% interest compounded annually on his 35th birthday. How much will be his annual payout
for 5 years if it will happen for the first time on his 60th birthday?
Answer: _______________
2. A certain vehicle is available through monthly installment plan of P20,000 payable for 3
years at 6% compounded semi-annually. If the first payment should be made 4 months after
availing the plan, how much is the cash price of the vehicle?
Answer: _______________

IV. Rubric for Scoring

This is how you will earn points.
Points Indicators
4 Exemplary response; No error in the computation
3 Competent response; with minimal error in the computation
2 Minor flaws but acceptable answers
1 Serious flaws; needs improvement

V. Reflection

1. What is the importance of comparing the fair market value of the cash flows
between different instalment plans, loan terms and investment schemes?
_________________________________________________________________________
_________________________________________________________________________
2. Is it good to invest money in a pension plan? Why or why not?
_________________________________________________________________________
_________________________________________________________________________

VI. Answer Key

Lesson 1, Activity 1
𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐹𝑉1 )𝑜𝑓 𝑃5000 𝑑𝑜𝑤𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 = 𝑃5,807.36
𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐹𝑉2 ) 𝑜𝑓 𝑃2000 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 = 𝑃77,506.67

𝐹𝑀𝑉 = 𝐹𝑉1 + 𝐹𝑉2 = 𝑷𝟖𝟑, 𝟑𝟏𝟒. 𝟎𝟑

Lesson 1, Activity 2
a. P105,094.53

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b. Simple Ordinary annuity because the payment interval is the same as interest interval
c. P101,890.67
d. investment in ABC Investment Corporation.
Lesson 1, Activity 3
a. 𝑃𝑉1 = 58,742.41 is greater than 𝑃𝑉2 = 58,550.62
b. 𝐹𝑉1 = 61,092.21 is greater than 𝐹𝑉2 = 60,892.65
c. Since the Present and Future values of the first payment scheme is greater than that of
the second payment scheme therefore, the first payment scheme has a better fair market
value.

Lesson 2, Activity 1 Lesson 2, Activity 2

1. 𝑘 = 5 1. 𝑅 = 𝑃123,179.71
2. 𝑘 = 1 2. 𝑃𝑉 = 𝑃648,442.07
3. 𝑘 = 5
4. 𝑘 = 3
5. 𝑘 = 9

VII. References

(1) https://www.investopedia.com/terms/p/present-value-annuity.asp
(2) https://www.investopedia.com/terms/f/future-value-annuity.asp
(3) General Mathematics Learners Manual, p. 199

DEVELOPMENT TEAM OF THE LEARNER’S PACKET

Writer : JUMAR R. VELASCO- Ragay SMOHS

Reviewer : JOHN EMMANUEL R. IBE – Magarao NHS
Editor : SONIA V. MORAL – Colacling NHS
Lay-out Artist : JHOMAR B. JARAVATA – Bula NHS
Illustrator : JHOMAR B. JARAVATA- Bula NHS
Validator : MICHEL C. BISUÑA – Gainza NHS
Language Editors : QUICKSY LYN MARIE P. BRIZUELA - Bula NHS
AILYN P. BUSTARGA – Bula NHS

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