Annuities

a series of cash flows of equal

amount, equally spaced in time
(Installment)
 Definition of terms
Annuity due- the cash flow occurs at the
beginning of each period.

Ordinary annuity- payments are made at

the end of each period(usually annually)

Perpetuity- cash flow lasts forever or

indefinite
Present Value of an Annuity
•
PVA= )
Where:
C= Equal Cash Flow Stream
R= Interest Rate
T= Time Period
 Future Value Annuity
•
FVA=
Where:
C= Equal Cash Flow Stream
R= Interest Rate
T= Time Period
 Problems
1. Mr. Yusoph wants to buy a pair of shoes worth
PHP 10, 500. He has the option of paying it
today for PHP10, 500 or buying them in
installment where he has to pay a down
payment of PHP4, 000 today and the balance
will be paid in two equal payments of PHP 4, 000
each for the next two years. Given an interest
rate of 10%, which is a better option?
 Problems
2. Mr Mendoza wishes to determine how much
the value of his savings in 5 years will be if he
will put PHP1, 000 per year in a bank which
provides 7% interest per annum.

3. Your father obtained a car loan payable in 5

equal installments of PHP200, 000 at the end of
the next 5 years with an annual rate of 5%.
 Problems
5. Your brother borrowed from your neighbor to
buy a new mobile phone. The neighbor charged
11% for the borrowed amount payable in three
annual payments of PHP3, 000.
 Present Value of Perpetuity
•

Example: You expect to receive PHP25, 000

annually at 5% interest rate.
Loan and amortization
 Loan
Is the act of giving money, property or other
material goods to another party in exchange
for future repayment of the principal amount
along with interest or other finance charges.
 Pure Discount Loan

Is the simplest form of loan.

 Pure Discount Loan
For Example:
Supposed a debtor was able to repay Php25,
000 in five years. On the part of the creditor,
who wants an interest rate of 12% on the
loan, how much would be the amount to
lend now? Or what should be the amount of
loan today, to get Php25, 000 on the fifth
year?
 Pure Discount Loan
Example:
Treasury bills are pure discount loans. If a T-bill
promises to repay Php10, 000 in 12 months, and
the market interest is 7%, how much will be the
bill sell for in the market?
 Interest- only loans

Allows the debtor to pay interest each period

and to repay the principal at some point in time.
Notice that if there is just one period, a pure
discount loan and interest only loan are the
same.
 Interest- only loans
For example,
with a three-year, 10 percent, interest-only loans
of Php10, 000, the debtor would pay Php10, 000
x .10= Php1, 000 in interest at the end of the first
and second years. At the end of the third year,
the borrower would return the Php10, 000 along
with another Php1, 000 in interest for that year.
Most corporate bonds have the general form of
interest-only loan
 Amortized loan

Requires the debtor to repay parts of the loan

amount over time. The debtor pays the interest
each period plus fixed amount. The process
provides loan payments on regular principal
reductions.
 Amortized loan
Suppose a business takes out a Php50, 000, five
year loan at 9%. The loan agreement calls for
the debtor to pay the interest on the loan
balance each year and to reduce the loan
balance each year by Php10, 000. Because the
loan amount declines by Php10, 000 each year,
it is fully paid in five years.
 Amortized loan

For example:
suppose our five-year, 9% Php50, 000 Loan.
 Amortized loan
1. CM Company borrowed Php 2, 000, 000 from a
bank on June 30, 2015. The loan has an annual
interest rate of 10% and the principal is payable at
the end of every quarter amounting to Php250, 000.
The first quarterly payment will be on September
30, 2015. Prepare an amortization schedule for 2015
until the loan is fully paid on September 30, 2017.
How much interest expense is incurred in 2015 and
2016 with respect to this loan?