DEFERRED ANNUITY

DEFERRED ANNUITY
• An annuity wherein there are no payments or deposits for a number of
periods after the beginning of the term but instead are postponed on a later
date.

First
Payment

0 1 2 3 4 5 6 7 8
Payment Payment Payment Payment Payment
 PRESENT VALUE DEFERRED ANNUITY

PRESENT VALUE PRESENT VALUE OF ANNUITY

OF DEFERRED
ANNUITY
FUTURE VALUE DEFERRED ANNUITY

FUTURE VALUE
OF DEFERRED
ANNUITY
 Find the present value of an annuity of P33,000 payable at the end of each
year if the first payment is made at the end of 3 years and last payment is
made at the end of 9 years. Assume money is worth 10% effective.

PV Factor 4.8684 i = 10% n=7

PV of annuity = P160,657.20

PV Factor 0.8264 i = 10% n=2

PV of deferred annuity = P132,671.11
Find the amount of the annuity presented previously.

FV Factor 2.3579 i = 10% n=9

FV of deferred annuity = P312,825.21
PERPETUITY
ORDINARY PERPETUITY
𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑃𝑉 =
𝑖

PERPETUITY DUE
𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑃𝑉 = ( )(1+i)
𝑖

DEFERRED PERPETUITY
𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑃𝑉 = (1 + 𝑖)−𝑑
𝑖
If money is worth 15% effective, what is the present value of an annuity of
P100,000 if payments are made indefinitely at the end of each year?

If money is worth 8% effective, what is the present value of an annuity of

P320,000 if payments are made indefinitely at the beginning of every `year?

If money is worth 6% effective, what is the present value of a perpetuity of

P85,000 if first payment is paid at the end of the`2 years?
GROWING ANNUITY
 GROWING ANNUITY

A series of payments or receipts occurring over a specified number

of periods that increase each period at a constant percentage or
growth rate. In a growing ordinary annuity, payments or receipts
occur at the end of each period; in a growing annuity due,
payments or receipts occur at the beginning of each period.
FUTURE VALUE OF A GROWING ORDINARY
ANNUITY
i is not equal to g
1+𝑖 𝑛− 1+𝑔 𝑛
𝐹𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑖−𝑔

i is equal to g
𝐹𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑛 1 + 𝑖 𝑛−1
To illustrate, suppose Ms. Investor receives a 3-year ordinary annuity that begins
at $1,000 but increases at a 10% annual rate. She deposits the money in a savings
account at the end of each year. The account earns interest at a rate of 6%
compounded annually. How much will her account be worth at the end of the 3-
year period?
Payment for the first year = $1,000
i = 6%
n=3
g = 10%
To illustrate, suppose Ms. Investor receives a 3-year ordinary annuity that
begins at $1,000 but increases at a 10% annual rate. She deposits the money
in a savings account at the end of each year. The account earns interest at a
rate of 6% compounded annually. How much will her account be worth at
the end of the 3-year period?
Period 1 Period 3
Payment 1,000 Payment(1000x(1.10)2 ) or (1,100x1.1) 1,210
FV factor (i=6%, n=2) 1.1236
FV 1,123.60 FV at the end of 3 years = 1,123.60 + 1,166 + 1,210

Period 2 = 3,499.60
Payment (1000x (1.10)) 1,100
FV factor (i=6%, n=1) 1.0600
FV 1,166
 i is not equal to g
𝑛 𝑛
1+𝑖 − 1+𝑔
𝐹𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 1
𝑖−𝑔

(FV factor i= 6% n=3) −(𝐹𝑉 𝑓𝑎𝑐𝑡𝑜𝑟 𝑔=10% 𝑛=3)

FV = 1,000
𝑖−𝑔

(1.1910) −(1.3310)
FV = 1,000
0.06−0.10

(1.1910) −(1.3310)
FV = 1,000 0.06−0.10

FV = 3,500
PRESENT VALUE OF A GROWING ORDINARY
ANNUITY
i is not equal to g
1+𝑔 𝑛
1− 1+𝑖
P𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑖−𝑔

i is equal to g
𝑛
P𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 1+𝑖
For example, to find the present value of a 3-year ordinary annuity that begins
at $1,000 but increases at a 10% annual rate, discounted at 6%
Period 1 Period 3
Payment 1,000 Payment(1000x(1.10)2 ) or (1,100x1.1) 1,210
PV factor (i=6%, n=1) 0.9434 PV factor (i=6%, n=3) 0.8396
PV 943.40 PV 1,015.92

Period 2
Payment (1000x (1.10)) 1,100 PV = 943.40 + 979 + 1,015.92
PV factor (i=6%, n=2) 0.8900 = 2,938.32
PV 979
 1+𝑔 𝑛
1−
1+𝑖
P𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑖−𝑔

1+.10 3
1− 1+.06
P𝑉 = 1,000 0.06−.10

1+.10
1−(𝐹𝑉 𝑓𝑎𝑐𝑡𝑜𝑟 𝑎𝑡 𝑟𝑎𝑡𝑒 𝑜𝑓 1+.06 𝑛=3)
P𝑉 = 1,000 0.06−.10

1−(1.1175)
P𝑉 = 1,000 0.06−.10

P𝑉 = 2,938.33
FUTURE VALUE OF A GROWING ANNUITY
DUE

1+𝑖 𝑛− 1+𝑔 𝑛
𝐹𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 1+𝑖
𝑖−𝑔
To illustrate, suppose Ms. Investor receives a 3-year ordinary annuity that
begins at $1,000 but increases at a 10% annual rate. She deposits the money
in a savings account at the beginning of each year. The account earns interest
at a rate of 6% compounded annually. How much will her account be worth
at the end of the 3-year period?
Payment 1 Payment 3
Payment 1,000 Payment(1000x(1.10)2 ) or (1,100x1.1) 1,210
FV factor (i=6%, n=3) 1.1910 FV factor (i=6%, n=1) 1.0600
FV 1,191 FV 1,282.60

Payment 2 FV at the end of 3 years = 1,191 + 1,235.96 + 1,282.60

Payment (1000x (1.10)) 1,100 = 3,709.56
FV factor (i=6%, n=2) 1.1236
FV 1,235.96
 i is not equal to g
1+𝑖 𝑛 − 1+𝑔 𝑛
𝐹𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 1 1+𝑖
𝑖−𝑔

(FV factor i= 6% n=3) −(𝐹𝑉 𝑓𝑎𝑐𝑡𝑜𝑟 𝑔=10% 𝑛=3)

FV = 1,000 1+𝑖
𝑖−𝑔

(1.1910) −(1.3310)
FV = 1,000 1 + .06
0.06−0.10

FV = 3,710
PRESENT VALUE OF A GROWING ANNUITY
DUE

1+𝑔 𝑛
1−
1+𝑖
P𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 1+𝑖
𝑖−𝑔
For example, to find the present value of a 3-year annuity due that begins at
$1,000 but increases at a 10% annual rate, discounted at 6%
 Payment 3
Payment 1 1,000 Payment(1000x(1.10)2 ) or (1,100x1.1) 1,210
PV factor (i=6%, n=2) 0.8900
PV 1,076.90

Payment 2
Payment (1000x (1.10)) 1,100 PV = 1,000 + 1,037.74 + 1,076.90
PV factor (i=6%, n=1) 0.9434 = 3,114.64
PV 1,037.74
 1+𝑔 𝑛
1−
1+𝑖
P𝑉 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 1+𝑖
𝑖−𝑔

1+.10 3
1− 1+.06
P𝑉 = 1,000 1 + 0.06
0.06−.10

1+.10
1−(𝐹𝑉 𝑓𝑎𝑐𝑡𝑜𝑟 𝑎𝑡 𝑟𝑎𝑡𝑒 𝑜𝑓 1+.06 𝑛=3)
P𝑉 = 1,000 1 + 0.06
0.06−.10

1−(1.1175)
P𝑉 = 1,000 1 + 0.06
0.06−.10

P𝑉 = 3,113.75