MODULE WEEK NO.

Pamantasan ng Lungsod ng Maynila

Gen. Luna corner Muralla St., Intramuros, Manila
Philippines 1002
(+63 2) 8 643-2500

College/Department
COURSE CODE: Mathematics of Investment
Semester of A.Y. 2020-2021

Introduction

This module focuses on the main types and basic concepts of annuities. This will show how to
calculate the future value, present value, periodic payment, term of the loan of an ordinary simple
annuity in different applications.

Rationale
COURSE MODULE

The purpose of this module is to prepare the students in understanding the importance and take
advantage of annuities.

Intended Learning Outcomes

A. Explain the Basic Concept of Annuities

B. Use the Ordinary Simple Annuity formula to calculate the Present and Maturity Value
C. Use the Ordinary Simple Annuity formula to calculate Interest, Interest Rate, and Time
Period
Activity

1. Recap from the previous session

2. Presentation of Module Week 5 and Chapter End Activities.
3. Scope of Quiz

Discussion

1
 MODULE WEEK NO. 5
Explain:

5.1 The Basic Concept of Annuities

Sirug W. (2014). Annuities is a series of equal payments made at regular intervals.

Zorilla et. Al (2015). The word “annuity” implies etymologically annual payments, but it is generally
understood to a apply a series of equal payments at any equal intervals of time, whether they be made
annually, semi-annually, monthly etc.

Kurt D. (2020). An annuity is a contract between you and an insurance company in which you make
a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning
either immediately or at some point in the future.
COURSE MODULE

A. Classification of Annuity based on Term

1. Contingent Annuities – annuities with no fixed number payments but depend on an

uncertain time periods (ex. life insurance that cease when the person insured dies).
2. Annuities Certain – annuities that have stated beginning and ending dates or have a
specified number of time periods (ex. mortgage payments of house, salary, installment
plans).
3. Perpetuity – annuity in which the periodic payments begin on a fixed date and continue
indefinitely. It is sometimes referred to as a perpetual annuity (ex. fixed coupon payments on
permanently invested (irredeemable sums of money, scholarships aid perpetually from an
endowment).

2
 MODULE WEEK NO. 5

B. Classification of Annuity based on Payment Schedule

1. Ordinary Annuity – an annuity that is paid or received at end of the time period (ex.
salaries, stock dividends, etc.).
2. Annuity Due – an annuity that have stated beginning and ending dates or have a specified
number of time periods (ex. rent, educational insurance plan, etc.).
3. Deferred Annuity – an annuity in which the first payment is delayed or deferred for a period
(ex. SSS salary loan, Pag-ibig salary loan, etc.).

C. Classification of Annuity based on Interest Period and Payment Interval

COURSE MODULE

1. Simple Annuity – annuity in which the number of compounding periods per year coincides
with the number of annuity payments per year.
2. General Annuity – an annuity in which the annuity payments and compounding periods do
not coincides.

Annuity Timing of Payment Start of Annuity End of Annuity

Type Payments in a Frequency and And And
Payment Compounding First Payment Last Payment
Interval Frequency Same Date? Same Date?
Ordinary Simple End Equal No, first payment Yes
Annuity one interval later
Ordinary General End Unequal No, first payment Yes
Annuity one interval later
Simple Annuity Beginning Equal Yes No, last payment
Due one interval
earlier
General Annuity Beginning Unequal Yes No, last payment
Due one interval
earlier

3
 MODULE WEEK NO. 5

D. Annuity Terms:

1. Payment Interval (payment period) – the length of time between two successive payments
in an annuity.
2. Term of Annuity – the total time from the beginning of the first payment interval to the end
of the last payment interval.
3. Periodic Rent (periodic payment) – the size of each payment.
4. Future Value of an annuity – the sum of the compound amount of all payments
compounded to the end of the term.
5. Present value of an annuity – the lump sum required at the beginning.
COURSE MODULE

The compound frequency (conversion frequency) is the number of compounding that take place in a
year. The common compounding or conversion frequencies and the corresponding compounding or
conversion periods encountered are listed below.

Compounding or Conversion No. of Compounding or Compounding or Conversion

Frequency Conversions Per Year Periods
Annual 1 1 year
Semiannual 2 6 months
Quarterly 4 3 months
Bimonthly 6 2 months
Monthly 12 1 month

Note:

Compounds per year or compounding frequency (CY) - the number of

compounding periods per complete year.

Payment per year or payment frequency (PY) - the number of payment

intervals per complete year.

4
 MODULE WEEK NO. 5

The following variables will be used in solving annuities:

j = Nominal interest rate

m = Number of conversions per year
t = Time period (term) of the loan or investment
n = Number of payments in the annuity
i = Interest rate per compounding period
R = Size of each annuity payment
Sn = Future value of an n-payment ordinary simple annuity
An = Present value of an n-payment ordinary simple annuity
COURSE MODULE

The following equation will be used in solving annuities:

(𝟏+𝒊) 𝒏 −𝟏
𝑺𝒏 = 𝑹 [ ] Equation 5.1
𝒊
𝟏−(𝟏+𝒊) −𝒏
𝑨𝒏 = 𝑹 [ 𝒊
] Equation 5.2

𝑺𝒏 𝒊
𝑹= (𝟏+𝒊) 𝒏 −𝟏
Equation 5.3

𝑨𝒏 𝒊
𝑹= Equation 5.4
𝟏−(𝟏+𝒊) −𝒏

𝑺 𝒊
𝒍𝒐𝒈 [ 𝒏 +𝟏 ]
𝑹
𝐧= Equation 5.5
𝒍𝒐𝒈 (𝟏+𝒊)

𝑨 𝒊
𝒍𝒐𝒈 [𝟏− 𝒏 ]
𝑹
𝐧= Equation 5.6
− 𝒍𝒐𝒈 (𝟏+𝒊)

5
 MODULE WEEK NO. 5

5.2 Computing the Future Value of an Ordinary Simple Annuity

In this section we will used the Equation 5.1 in computing future value.

Future Value

(𝟏 + 𝒊) 𝒏 − 𝟏
𝑺𝒏 = 𝑹 [ ]
𝒊
COURSE MODULE

Where:

Sn = Future value of an n-payment ordinary simple

annuity

R = Size of each annuity payment

t = time period (term) of the loan or investment

m = number of conversions per year

n = number of payments in an annuity

j = nominal interest rate

i = interest rate per compounding period

Example 1: Danah has been contributing Php 460 at the end of each quarter for the past 18
quarters to a savings plan that earns 9% compounded monthly? What amount will she
accumulate if she continues with the plan for another year.

6
 MODULE WEEK NO. 5

Solution: Given: R = Php 460 j = 9% or 0.09

m=4 n = 18 + 4 = 22 i = j/m = 0.09/4 = 0.0225

(𝟏+𝒊) 𝒏 −𝟏
𝑺𝒏 = 𝑹 [ ]
𝒊
(1+0.0225) 22 −1
= 460 [ 0.0225
]
1.631522122−1
= 460 [ 0.0225
]

= 460 (28.06764989)
= Php 12,911.11895 or Php 12,911.12

Danah will have accumulated Php 12,911.12 one year from now.
COURSE MODULE

Example 2: Chris spends Php 850 per month on cigarettes. If he stops smoking and invests the
same amount in a plan paying 15% compounded monthly, how much will he have after 4
years?

Solution: Given: R = Php 850 j = 15% or 0.15 t = 4 years

m = 12 n = tm = 4(12) = 48 i = j/m = 0.15/12 = 0.0125

(𝟏+𝒊) 𝒏 −𝟏
𝑺𝒏 = 𝑹 [ ]
𝒊
(1+0.0125) 48 −1
= 850 [ 0.0125
]
1.815354853−1
= 850 [ 0.0125
]

= 850 (65.22838824)
= Php 55,444.13001 or Php 55,444.13

Chris will have accumulated Php 55,444.13in 4 years.

7
 MODULE WEEK NO. 5

5.3 Computing the Present Value of an Ordinary Simple Annuity

In this section we will used the Equation 5.2 in computing the present value.

Present Value

𝟏 − (𝟏 + 𝒊) −𝒏
𝑨𝒏 = 𝑹 [ ]
𝒊
COURSE MODULE

Where:

An = Present value of an n-payment ordinary simple

annuity

R = size of each annuity payment

t = time period (term) of the loan or investment

m = number of conversions per year

n = number of payments in an annuity

j = nominal interest rate

i = interest rate per compounding period

Example 1: An investment pays back Php 3,200 at the end of every six months for 15 years. At
the end of 15 years, the investment pays back Php 45,000 in addition to the regular Php 3,200.
What is the present value of all the payments if money can earn 4% compounded
semiannually?

8
 MODULE WEEK NO. 5

Solution: Given: For the annuity,

R = Php 3,200 t = 15 years j = 4% or 0.04 m=2
For the lump payment,
F = Php 45,000 t = 15 years j = 4% or 0.04 m=2
Therefore, i = j/m = 0.04/2 = 0.02 n = tm = 15(2) = 30

The combined present value is:

𝟏−(𝟏+𝒊) −𝒏 𝑭
𝑨𝒏 + 𝑷 = 𝑹 [ ]+
𝒊 (𝟏+𝒊)𝒏
COURSE MODULE

1−(1+0.02) −30 45,000

= 3,200 [ ]+
0.02 (1+0.02)30
0.447929111 45,000
= 3,200 [ ]+
0.02 1.811361584

= 3,200 (22.39645555) + (24,843.19)

= 71,668.65776 + 24,843.19
= 𝑷𝒉𝒑 𝟗𝟔, 𝟓𝟏𝟏. 𝟖𝟒𝟕𝟕𝟔 𝒐𝒓 𝑷𝒉𝒑 𝟗𝟔, 𝟓𝟏𝟏. 𝟖𝟓

The present value of the payment is Php 96,511.85.

Example 2: Determine the present value on July 7 of Php 6,800 paid at the end of each
subsequent calendar quarter for 7 years if money is worth 6% compounded quarterly?

Solution: Given: R = Php 6,800 j = 6% or 0.06 t = 7 years

m=4 n = tm = 7(4) = 28 i = j/m = 0.06/4 = 0.015

9
 MODULE WEEK NO. 5

𝟏−(𝟏+𝒊) −𝒏
𝑨𝒏 = 𝑹 [ ]
𝒊
1−(1+0.015) −28
= 6,800 [ ]
0.015
1−0.6590992494
= 6,800 [ ]
0.015

= 6,800 (22.72671671)
= 𝑷𝒉𝒑 𝟏𝟓𝟒, 𝟓𝟒𝟏. 𝟔𝟕𝟑𝟔 𝒐𝒓 𝑷𝒉𝒑 𝟏𝟓𝟒, 𝟓𝟒𝟏. 𝟔𝟕

The present value of an annuity is Php 154,541.67.

5.4 Computing the Periodic Payment of an Ordinary Simple Annuity

COURSE MODULE

In this section we will used the Equation 5.3 in computing the periodic payment when future value is
given.

Periodic Payment – Future Value is given

𝑺𝒏 𝒊
𝑹=
(𝟏 + 𝒊) 𝒏 − 𝟏
Where:

Sn = Future value of an n-payment ordinary simple

annuity

R = Size of each annuity payment

t = time period (term) of the loan or investment

m = number of conversions per year

n = number of payments in an annuity

j = nominal interest rate

i = interest rate per compounding period

10
 MODULE WEEK NO. 5

Example 1: How much must be set aside semi-annually to have a fund of Php 8,000 at the end
of 12 years with the interest rate of 4% compounded semi-annually?

Solution: Given: Sn = Php 8,000 t = 12 years j = 4% or 0.04

m=2 n = tm = 12(2) = 24 i = j/m = 0.04/2 = 0.02

𝑺𝒏 𝒊
𝑹= 𝒏
(𝟏+𝒊) −𝟏

8,000 (0.02)
= (1+0.02) 24 −1
160
=
0.6084372495
COURSE MODULE

= 𝑷𝒉𝒑 𝟐𝟔𝟐. 𝟗𝟔𝟖𝟕𝟕𝟖 𝒐𝒓 𝑷𝒉𝒑 𝟐𝟔𝟐. 𝟗𝟕

The amount that must be set aside is Php 262.97.

Example 2: What monthly deposits at 7% compounded monthly will earn a debt of Php
10,000 due in 12 years.

Solution: Given: Sn = Php 10,000 t = 12 years j = 7% or 0.07

m = 12 n = tm = 12(12) = 144 i = j/m = 0.07/12 = 0.00583..

𝑺𝒏 𝒊
𝑹 = 𝒏
(𝟏+𝒊) −𝟏

10,000 (0.005833333)
=
(1+0.005833333) 144 −1
58.33333333
=
1.310720744
= 𝑷𝒉𝒑 𝟒𝟒. 𝟓𝟎𝟒𝟕𝟕𝟔𝟏𝟕 or 44.50

The monthly deposit is Php 44.50 due in 12 years.

11
 MODULE WEEK NO. 5

5.5 Computing the Periodic Payment of an Ordinary Simple Annuity

In section we will used the Equation 5.3 in computing the periodic payment when present value is
given.

Periodic Payment – Present Value is given

COURSE MODULE

𝑨𝒏 𝒊
𝑹=
𝟏 − (𝟏 + 𝒊) −𝒏
Where:

An = Present value of an n-payment ordinary simple

annuity

R = size of each annuity payment

t = time 8 period (term) of the loan or investment

m = number of conversions per year

n = number of payments in an annuity

j = nominal interest rate

i = interest rate per compounding period

Example 1: Liam sold a piece of property for Php 1,300,000. A down payment of Php 500,000
was made and the remainder was to be repaid in equal quarter installments, the first payment

12
 MODULE WEEK NO. 5

is due 3 months after the date of sale. The interest was 15% compounded quarterly, and the
debt was to be amortized in 7 years.

A. What quarterly payment is required?

B. What will be the total amount of payment?
C. How much interest will be paid?
D. What is the total cost of the property?

Solution: Given: Cash Value = Php 1,300,000 Down Payment = Php 500,000
t = 7 years j = 15% or 0.15 m=4
COURSE MODULE

n = tm = 7(4) = 28 i = j/m = 0.15/4 = 0.0375

Present Value = Cash Value – Down Payment = Php 1,300,000 – 500, 000 = 800, 000

A. Periodic Payment
𝑨𝒏 𝒊
𝑹=
𝟏 − (𝟏 + 𝒊) −𝒏
800,000 (0.0375)
=
1−(1+0.0375) −28
30,000
=
0.6432754085
= 𝟒𝟔, 𝟔𝟑𝟔. 𝟑𝟐𝟑𝟒𝟐 𝒐𝒓 𝟒𝟔, 𝟔𝟑𝟔. 𝟑𝟐

The debt will be paid off in 7 years by quarter installments of Php 46,636.32.

B. Total Payments = Periodic Payment x No. of Payments

= Php 46,636.32 x 28
= Php 1,305,816.96

The amount of payments will be Php 1,305,816.96.

13
 MODULE WEEK NO. 5

C. Interest = Total Paid – Original Loan

= Php 1,305,816.96 – 800,000
= Php 505,816.96

The interest will amount to Php 505,816.96.

D. Total Cost = Down Payment + Total Regular Payments

= Php 500,000 + 1,305,816.96
= Php 1,805,816.96
COURSE MODULE

The total cost of the property is Php 1,805,816.96.

Example 2: Maegan wants to consolidate a lot of smaller debts into a single three-year loan for
Php 25,000. If the loan charged interest at 7.8% compounded monthly, what is her payment
amount at the end of every month.

Solution: Given: An = Php 25,000 t = 3 years j = 7.8% or 0.078

m = 12 n = tm = 3(12) = 36 i = j/m = 0.078/12 = 0.0065

𝑨𝒏 𝒊
𝑹 =
𝟏−(𝟏+𝒊) −𝒏
25,000 (0.0065)
=
1−(1+0.0065) −36
162.50
=
0.2080387218
= 𝑷𝒉𝒑 𝟕𝟖𝟏. 𝟏𝟎𝟒𝟓𝟖𝟕𝟔 𝒐𝒓 𝑷𝒉𝒑 𝟕𝟖𝟏. 𝟏𝟎

Maegan needs to pay Php 781.10 for the next three years to pay off her consolidated loan.

14
 MODULE WEEK NO. 5

5.6 Computing the Term of an Ordinary Simple Annuity

In this section we will used the Equation 5.4 in computing the term when future value is given.

Term/Time Period – Future Value is given

𝑺𝒏 𝒊
𝒍𝒐𝒈 [ +𝟏]
𝐧= 𝑹
COURSE MODULE

𝒍𝒐𝒈 (𝟏 + 𝒊)
Where:

Sn = Future value of an n-payment ordinary simple

annuity

R = Size of each annuity payment

t = time period (term) of the loan or investment

m = number of conversions per year

n = number of payments in an annuity

j = nominal interest rate

i = interest rate per compounding period

15
 MODULE WEEK NO. 5

Example 1: How long will it take for annual year-end contributions of Php 57,000 to an
Educational Savings Plan to grow to Php 1,000,000 if the plan earns 13% compounded
annually?

Solution: Given: R = Php 57,000 Sn = Php 1,000,000 j = 13% or 0.13

m=1 i = j/m = 0.13/1 = 0.13

𝑺 𝒊
𝒍𝒐𝒈 [ 𝒏 +𝟏 ]
𝑹
𝐧=
COURSE MODULE

𝒍𝒐𝒈 (𝟏+𝒊)
1,000,000 (0.13)
𝑙𝑜𝑔 [ +1 ]
57,000
=
𝑙𝑜𝑔 (1+0.13)
𝑙𝑜𝑔 1.00741
=
0.05307844348
0.5159667509
=
0.05307844348
= 𝟗. 𝟕𝟐𝟎𝟖𝟑𝟒𝟐𝟒𝟏 𝐨𝐫 𝟗. 𝟕𝟐 𝐲𝐞𝐚𝐫𝐬

Since there is just one payment per year, it will take 9.72 years to accumulate Php 1,000,000.

16
 MODULE WEEK NO. 5

5.7 Computing the Term of an Ordinary Simple Annuity

In this section we will used the Equation 5.6 in computing the term when present value is given.

Term/Time Period – Present Value is given

COURSE MODULE

𝑨𝒏 𝒊
𝒍𝒐𝒈 [𝟏 − ]
𝐧= 𝑹
− 𝒍𝒐𝒈 (𝟏 + 𝒊)
Where:

An = Present value of an n-payment ordinary simple

annuity

R = size of each annuity payment

t = time period (term) of the loan or investment

m = number of conversions per year

n = number of payments in an annuity

j = nominal interest rate

i = interest rate per compounding period

17
 MODULE WEEK NO. 5

Example 1: Rom borrowed Php 3,450 which he agrees to repay installments of Php 250 at the
end of each 6 months. How long will it take to pay the principal ad interest at 7% compounded
semi-annually.

Solution: Given: R = Php 250 An = Php 3,450 j = 7% or 0.07

m=2 i = j/m = 0.07/2 = 0.035

𝑨 𝒊
𝒍𝒐𝒈 [𝟏− 𝒏 ]
COURSE MODULE

𝑹
𝐧=
− 𝒍𝒐𝒈 (𝟏+𝒊)
𝟑,𝟒𝟓𝟎 (𝟎.𝟎𝟑𝟓)
𝒍𝒐𝒈 [𝟏− ]
𝟐𝟓𝟎
=
− 𝒍𝒐𝒈 (𝟏+𝟎.𝟎𝟑𝟓)
𝑙𝑜𝑔 0.517
= −0.014940349
0.2865094569
=
0.014940349

= 19.17689185 or 19.18 semi-annual payments

It will take 19.18 semi-annual payments to repay installments at the end of each 6 months.

18
 MODULE WEEK NO. 5

Elaborate:

Modified True or False. Write TRUE if the statement is correct and change the identified word
if False.

1. ____________ Perpetuity is an annuity in which the periodic payments begin on a fixed date
and continue indefinitely.

2. ____________ SSS Salary Loan and Pag-ibig Salary Loan are examples of Annuity Due.

3. ____________ Payment Frequency and Compounding Frequency in an Ordinary Simple

Annuity is unequal.
COURSE MODULE

4. ____________ Number of compounding or conversion per year in Quarterly is 3 months.

5. ____________ Payment per year or payment frequency refers to the number of payment
intervals per complete year.

Evaluate:

Computations. Analyze and write the complete solutions including conclusions.

1. Find the amount of an annuity of Php 700 payable at the end of each 6 months for 15 years if
money is worth 4% compounded semi-annually.

Solution:

19
 MODULE WEEK NO. 5

2. Determine the amount of an annuity if Ria’s contribution for the past 12 quarters is Php 670 each
quarter and money is worth 15% compounded monthly.

Solution:
COURSE MODULE

3. Find the present value of an annuity of Php 800 per annum for 35 years if money is worth 6%.

Solution:

4. A car was purchased under these terms: Php 150,000 down payment and Php 12,000 each month
for 4 years. If money is worth 9% compounded monthly, find the cash price of the car.

Solution:

20
 MODULE WEEK NO. 5

5. DTF agency wishes to pay off a debt of Php 130,000 in 2 years. What regular payment would
they need to make every month, at 12% interest compounded monthly?

Solution:
COURSE MODULE

6. ROJ Software needs to accumulate Php 400,000 in 3 years to meet future needs. What regular
payments would they need to make at the end of each quarter, at 8% interest compounded
quarterly?

Solution:

21
 MODULE WEEK NO. 5

7. How many equal payments of Php 715 t the end of two months will e required to accumulate Php
10,000 at 8% compounded bimonthly?

Solution:
COURSE MODULE

8. Marie borrowed Php 95,782.27 and agreed to pay the principal and interest at 9% compounded
quarterly payments of Php 6,000, the first due in 3 months, how many payments must the debtor
make.

Solution:

22