Where do people pay by installment?

• Insurance Payments
• Major Purchases (appliances,
Property)
• Loan Payment
• Mortgages
Payment by installment are
done periodically, and in
equal amounts. This
payment scheme is called
ANNUITY.
Important Terms

• Term of an annuity, t
• Payment interval
• Regular or Periodic Payment, R
• Amount (Future Value) of an annuity, F
• Present value of an annuity, P
PAYMENT INTERVAL

The time between

successive payments.
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.
Annuity – Definition
Annuity is a series of (usually) equal payments
made at (usually) equal intervals of time.
Examples of annuity:
Shop rentals
Insurance policy premium
Regular deposits to saving accounts
Installment payments
 ANNUITIES
According to payment Simple Annuity- an annuity
interval and interest period where the payment interval is
the same as the interest
period.
According to time of payment Ordinary Annuity (or
Annuity Immediate) – a
type of annuity in which the
payments are made at the end
of each payment interval.
According to duration Annuity Certain- an annuity
in which payments begin and
end at definite times.
General Annuity- an annuity
where the payment interval is
NOT the same as the interest
period.
Annuity Due- a type of
annuity in which the
payments are made at the
beginning of each payment
interval.
Contingent Annuities- an
annuity in which the
payments extend over an
indefinite (or indeterminate)
length of time.
 Annuity – Classes
Annuity can be classified into many classes:
Annuity certain – payment are made at the end of each payment
period.
Annuity due – payment are made at the beginning of each period.
General annuity
Perpetuity & others.
In this chapter we shall mainly discuss ordinary annuity certain where
payment are made at the end of each payment periods & the interest
and payment periods are of the same interval.
 Ordinary Annuity-an annuity where the length of the
payment interval is the same as the length of the interest
compounding period.
Example:
1. Monthly installment payment with an interest rate that is
compounded monthly.
2. Paying a debt semi-annually when the interest is
compounded semi-annually.
 General Ordinary Annuity-an annuity where the length of
the payment interval is not the same as the length of the
interest compounding period.
Example:
1. Monthly installment payment with an interest rate that is
compounded quarterly.
2. Paying a debt semi-annually when the interest is
compounded annually.
 Deferred Annuity-an annuity that does not begin until a
given time interval has passed.
Example:
1. The payment will start at the end of 3 months.
2. The first payment is due one quarter after his 60th birthday.
Time diagram of an Ordinary Annuity
Time Diagram of a Deferred Annuity
 Suppose Mrs. Dalisay would like to save ₱3 000 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 or 0.5 yr.
Conversion period, m = 12
Interest rate, r = 9% or 0.09
periodic rate, i = 0.75% or 0.0075