Republic of the Philippines

Department of Education
Regional Office IX, Zamboanga Peninsula

11 Zest for Progress

Z P eal of artnership

General Mathematics
Quarter 2 - Module 3:
Simple Annuity

Name of Learner: ___________________________

Grade & Section: ___________________________
1
Name of School: ___________________________
General Mathematics
Alternative Delivery Mode
Quarter 2 – Module 3: Simple Annuity
First Edition, 2020

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Development Team of the Module

Writer’s Name: SOPHIA M. CAPA

Editor’s Name: PACIANO E. RECABO

Reviewer’s Name: ISMAEL K. YUSOPH

Management Team: MA. LIZA R. TABILON

LOURNA I. POCULAN

CID Chief LILIA E. ABELLO

EVELYN C. LABAD

MA. THERESA M. IMPERIAL

NORALYN R. SABANAL

Printed in the Philippines by ________________________

Department of Education – Region IX ZAMBOANGA PENINSULA
Office Address: Sindangan, Zamboanga del Norte
Contact No.: 09355733118
E-mail Address: sophia.capa@deped.gov.ph

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 11

General Mathematics
Quarter 2 – Module 3:
Simple Annuity

3
 Lesson
1 Simple Annuity

What I Need to Know

This module will tackle first the definition and types of annuities and why
annuities differ from simple and compound interests. Thereafter, you will be faced with
simple and general annuity problems. Aside from these, you will deal with various sets
of simple and general annuity problems such as maturity value, present value, and
future value. Special problems on fair market value of a cash flow stream that includes
an annuity and calculation of the present value and period of deferral of a deferred
annuity will also be incorporated for you to be exposed to making decisions on which
investments offer better returns.

After going through this module, you are expected to:

1. define annuity payment;
2. identify different types of annuity;
3. find the future value and present value of simple annuities.

What’s In

Answer each of the following:

1. ₱ 50, 000 is invested for 5 years at 8% compounded quarterly. Give the value
n

of each variable in the formula A  P 1 i 
where i 
r
K
and n  Kt.

a  P  b r  c i  d  n 
2. If ₱ 10 000 is invested for 10 years at 6% compounded semi-annually, the
final amount is ₱ 18 061.11. Give the value of each variable in the
n

formula A  P 1 i  where i 
r
K
and n  Kt.

a  P   b r  c i  d n  e A 

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 What’s New

What is an Annuity?
Annuity is a term that refers to a deposit or investment agreement between a
potential depositor on investor and a financial institution that promises to pay out a
steady amount of money over time. This agreement contains the commercial terms
such as deposit terms (e.g., lump-sum or installment deposit), interest rate, and
disbursement terms (e.g., interest and principal payments in installment). The
ultimate purpose of an annuity is to make sure that the investor will get steady source
of funds. According to the Investing Answers Financial Dictionary, annuity is a
contract whereby an investor makes a lump-sum payment to an insurance company,
bank, or other financial institution that, in return, agrees to give the investor either a
higher lump-sum payment in the future or a series of guaranteed payments. The word
annuity was derived from the Latin word annuus which means “annual”.
The concept of annuity is very much related to the foundation of simple and
compound interests. The only difference lies in the complexity of the components of
the financial instrument (e.g., longer term, higher interest rate, compounding). In the
future, when you become an entrepreneur or an employee, you will have your own
business income or salary. In time, you will learn the value of saving and investing.
Annuity comes in the picture when you save or invest either in lump sum or
installment, and when you receive this investment in the future through installment.
You have the option to choose whether you will put your money in regular savings or
time deposit, mutual fund or unit investment trust fund, insurance plan or retirement
plan, stocks or bonds, among others.
The paluwagan concept is a traditional Filipino way of investing wherein
participants or investors will contribute a certain amount per pay day or per month
and get a lump sum in the future. The most common examples of annuity are
mortgage or housing loan amortization, payment of insurance premium, rental
payments, long term investment, retirement or pension contribution, and college
educational plan.

Annuities may be classified in different ways, as follows.

Annuities
Simple Annuity – an General Annuity – an
According to payment annuity where the annuity where the
interval and interest payment interval is the payment interval is not the
period same as the interest same as the interest
period period
Ordinary Annuity (or
Annuity Due – a type of
According to time of Annuity Immediate) – a
annuity in which the
payment type of annuity in which
payments are made at
the payments are made at

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 the end of each payment beginning of each
interval payment interval
Contingent Annuity – an
Annuity Certain – an annuity in which the
annuity in which payments payments extend over an
According to duration
begin and end at definite indefinite (or
times indeterminate) length of
time

Note: Grade 11 will focus on Ordinary Annuities (not Annuity Due), and on Annuity
Certain (not Contingent Annuities). Simple Annuities are discussed in this lesson, and
General Annuities are discussed on Module 4.

Term of an annuity, t – time between the first payment interval and last payment
interval
Regular or Periodic payment, R – the amount of each payment

Amount (Future Value) of an annuity, F – sum of future values of all the payments
to be made during the entire term of the annuity

Present value of an annuity, P – sum of present values of all the payments to be

made during the entire term of the annuity

Annuities may be illustrated using a time diagram. The time diagram for an ordinary
annuity (i.e., payments are made at the end of the year) is given below.

Time Diagram for an n-Payment Ordinary Annuity

R R R R R … R
0 1 2 3 4 5 n

Example 1.
Suppose Mrs. Remoto would like to save P3,000 every month in a fund that
gives 9% compounded monthly. How much is the amount or future value of her
savings after 6 months?
Given: periodic payment R = P3,000
term t = 6 months
interest rate per annum i12  0.09
number of conversions per year m = 12
0.09
interest rate per period j   0.0075
12
Find: amount (future value) at the end of the term, F

Solution.

(1) Illustrate the cash flow in a time diagram.

3000 3000 3000 3000 3000 3000
0 1 2 3 4 5 6

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 (2) Find the future value of all the payments at the end of term (t = 6).
3000 3000 3000 3000 3000 3000
0 1 2 3 4 5 6

3000
3000(1 + 0.0075)
2
3000 1  0.0075
3
3000 1  0.0075
4
3000 1  0.0075
5
3000 1  0.0075
(3) Add all the future values obtained from the previous step.

3000 = 3000
3000 1  0.0075  = 3022.5
2
3000 1  0.0075 = 3045.169
3
3000 1  0.0075 = 3068.008
4 = 3091.018
3000 1  0.0075
5
3000 1  0.0075 = 3114.20
F =18340.89

Thus, the amount of this annuity is P18,340.89.

Amount (Future Value) of an Ordinary Annuity: The derivation of the formula in finding
the amount of an ordinary annuity is similar to the solution of Example 1.

Alternate Solution to Example 1:

Amount (Future Value) of Ordinary Annuity:

The future value F of an ordinary annuity is given by

n
FR
1  j  1
j
where R is the regular payment
j is the interest rate per period
n is the number of payments
n 6
FR
1  j  1
 3000
1  0.0075   1
 18,340.89
j 0.0075

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Example 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?
Given: R = 200
m = 12
i12  0.0025
0.0025
j  0.0002083
12
t = 6 years
n = tm = (6)(12)= 72 periods
Find F.
Solution.

 
n 72
 
1  j  1 1  0.0002083 1
FR  200  14,507.02
j 0.0002083
Example 3:
(Recall the problem in Example 1.) Suppose Mrs. Remoto would like to know
the present value of her monthly deposit of P3,000 when interest is 9% compounded
monthly. How much is the present value of her savings at the end of 6 months?

Solution. Since we already know from Example 1 that the accumulated amount at
the end of 6 months is P18,340.89, then we can simply get the present value of this
amount using the formula
F F 18340.89
P n    17536.79
1  j   i m tm  0.09 6
1   1  
 m  12 

Present Value of an Ordinary Annuity:

n
1  1  j 
PR
j
where R is the regular payment
j is the interest rate per period
n is the number of payments

What is It
The cash value or cash price of a purchase is equal to the down payment (if
there is any) plus the present value of the installment payments.

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Example 4.
Mr. Ribaya paid P200,000 as down payment for a car. The remaining amount
is to be settled by paying P16,200 at the end of each month for 5 years. If interest is
10.5% compounded monthly, what is the cash price of his car?
Given: down payment = 200,000 ; R = 16,200 ; i12  0.105 ; m = 12 ;
0.105
j  0.00875
12
t = 5 years ; n = mt = (12)(5) = 60 periods
Find: cash value or cash price of the car

Solution.
The present value of this ordinary annuity is given by
n 60
1  1  j  1  1  0.00875 
PR  16200  753, 702.20
j 0.00875
Cash value = Down payment + present value
= 200,000 + 753,702.20
Cash Value = P953,702.20
The cash price of the car is P953,702.20.

Periodic payment R of an Annuity:

Periodic payment R can also be solved using the formula for amount F or
present value P of an annuity.
 1  j n  1   1  j n  1 
F  R  R  F / 
 j   j 
   
 1  1  j n   1  1  j n 
P  R  R  P/ 
 j   j 
   
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

Example 5.
Paolo borrowed P 100 000. He agrees to pay the principal plus interest by
paying an equal amount of money each year for 3 years. What should be his annual
payment if interest is 8% compounded annually?
Given:
P = 100 000 ; i1  0.08 ; m = 1 ; j = 0.08 ; t = 3 years ; n = mt = (1)(3) = 3 periods
Find: periodic payment R

Solution.
The cash flow of this annuity is illustrated in the time diagram given below.
P = 100,000

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 R=? R=? R=?
0 1 2 3

1  1  j 
n  1  1  j  n 
Since P  R then R  P /  
j  j 
 
 1  1  0.08 3 
R  100, 000 / 
    38,803.35
 0.08 
 
Thus, the man should pay P38,803.35 every year for 3 years.

What’s More

Read each situation carefully to solve each problem. Write your answer on a separate
sheet of your paper.

A. Find the future value F of the following ordinary annuities.

1. Monthly payments of P3,000 for 4 years with interest rate of 3% compounded
monthly
2. Quarterly payment of P5,000 for 10 years with interest rate of 2%
compounded quarterly
B. Find the present value P of the following ordinary annuities
3. Monthly payments of P2,000 for 5 years with interest rate of 12%
compounded monthly
4. Quarterly payment of P15,000 for 10 years with interest rate of 8%
compounded quarterly
C. Find the periodic payments (R) of the following ordinary annuities.
5. Monthly payment of the future value of P50,000 for 1 year with an interest
rate of 10% compounded monthly
6. Quarterly payment of an accumulated amount of P80,000 for 2 years with
interest rate of 8% compounded quarterly
D. Solve.
7. How much is the monthly amortization on an automobile loan of P900,000 to
be amortized over a 5-year period at a rate 9.5% compounded monthly?

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 What I Have Learned
A. Read and analyze the following statements. If you think the statement suggests
an incorrect idea, rewrite it on the given space, otherwise leave it blank.

1. An annuity is a sequence of payments made at fixed intervals or periods of time.

___________________________________________________________________
__________________________________________________________________
__________________________________________________________________

2. In simple annuity, both payment interval and interest period will always be the
same.
___________________________________________________________________
__________________________________________________________________
__________________________________________________________________

3. The ultimate purpose of an annuity is to make sure that the investor will get steady
source of funds.
___________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

What I Can Do

A. Match the terms in Column A to the statements in Column B.

Column A Column B
1. Present Value a. Regular Payment
b. Periodic payment is made at the
2. Future Value
end of each payment interval
3. Ordinary Value c. Number of payments per year

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 n
1  1  j 
4. Annuity Due d. P
j
n
5. PMT e. P
1  j  1
j
f. Periodic payment is made at the
6. P/Y beginning of each payment
interval

B. Solve the following problems.

1. Shirl started to deposit P18,000 semi-annually in a fund that pays 5%
compounded semi-annually. How much will be in the fund after 10 years?
2. A refrigerator is for sale at P17,999 in cash or on terms, P1,600 each month
for the next 12 months. Money is 9% compounded monthly. Which is lower,
the cash price or the present value of the installment terms? Prove your
answer.

Assessment

A. FILL IN THE BLANK.

1. An ___________________________ is a single sum of money that grows with

interest over time to a larger sum.
2. When a credit card company quotes an annual rate of 10% compounded monthly,
the EAR will be ___________________than the quoted rate.
3. If a person wants to know what an amount deposited today at 4% will be worth in
4 years, he is asking its________________________ value.
4. An _______________________ annuity has payments that occur at the end of
the time periods
5. Debt is ________________________ when the principal is paid off during the life
of the loan.
6. When a person wants to know what he must deposit today so that in 5 years he
will have $5,000, he is asking its ___________________ value.
7. Preferred stock is valued as a ________________________.
8. ______________________are specially designated funds into which the
company deposits money so that a bond can be paid off at maturity.
9. A dollar received today is worth _______________ than a dollar received one
year from today.
10. _________________________ is earning interest on previously earned interest.

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B. Solve the following problems.

1. Consider the following annuities:

Annuity 1 Annuity 2
Monthly deposit: ₱1, 000.00 Quarterly deposit: ₱3, 000.00
Time period: 5 years Time Period: 5 years
Annual Interest Rate: 8% Annual Interest Rate: 8%
Compounding Period: Monthly Compounding Period: Quarterly

a. Find the total deposit and the amount of each annuity.

b. Why are the amounts not the same even if the total deposits are the same?

2. Ken is paying P2,500 every 3 months for the amount he borrowed at an interest
rate of 8% compounded quarterly. How much did he borrow if he agreed that
the loan will be paid in 2 years and 6 months?

Additional Activities

Your local government aims to create a program that would help increase the
financial literacy of the people. To do this, it is important that they should know first the
saving and borrowing behavior of the people in your community.
As a researcher, you are commissioned to conduct a mini survey among the
senior citizens in your community.

Here are the questions that need to be answered by the respondents:

1. During the time you are working or earning money, did you have more savings
than loans or vice versa?
2. At this point in time, do you still have outstanding loans?
3. At this point in time, do you think you have enough savings?

You are not to ask them specific amounts. All questions should be answered
only with a “yes” or “no”. Your output should show the results of your survey which
must be organized and clearly explained.

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References

Books:

Oronce, Orlando A. General Mathematics, 1st Ed. Quezon City: Rex Book Store Inc.,
2016.

General Mathematics, 1st Edition: Diwa Book Store Incorporated, 2016

General Mathemtics Learning Material for Senior High School, 1st Edition: Department
of Education 2016

Online Sources:

https://www.google.com/search?q=multiple+choice+test+questions+on+simple+annu
ities&source=lmns&bih=566&biw=1266&hl=en&sa=X&ved=2ahUKEwjD97KHtqfrAh
UM4pQKHTgKAxoQ_AUoAHoECAEQAA

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