MODULE 7: GENERAL ANNUITIES

LESSON 1. Simple Annuity

Objectives:
At the end of the lesson, the learner will be able to:
1. Illustrate simple and general annuities
2. Distinguish between simple and general annuities
3. Computes the future value, present value and periodic payment of simple annuity

REVIEW
You use money in everyday life. In order to buy what you need, you do transactions involving
money.
In the previous lessons, you learned the methods of solving the value of money under
compound and simple interest environment. You have learned to illustrate and distinguish between
simple and compound. You also learned how to compute for the interest, present value and future
value in a simple and compound interest environment. As well as solve problems involving real life
situations of simple and compound interest.

Ma’am Angel wants to start a business with an initial capital of P100,000. She decided to
put up a fund with deposits made at the end of each month. If she wants to gain the initial capital
after 4 years, how much monthly deposit must be made?
In most cases where house or cars are purchased, a series of payments is needed at certain
points in time. Such Transaction is called ANNUITY.
An ANNUITY is a sequence of equal payments (or deposits) made at aregular interval
of time.
ANNUITY
Simple Annuity – an General Annuity – an annuity
According to annuity where the where the payment interval
payment interval and payment interval is the is not thesame as the
interest period same as the interest interest period.
period

Ordinary Annuity (Annuity Immediate) – a type ofannuity

According to time of
in which the payments are made at the end of each
payment
payment interval

According to Annuity Certain – an annuity in which paymentsbegin

duration and end at definite times.

Terms of Annuity (t)

The time between the first payment interval and the last payment interval.
Regular or Periodic Payment (R)
The amount of each payment.
Amount (Future Value) of an annuity (F)
The sum of future value of all the payments to be made during the entireterm of
the annuity.
Present Value of an annuity (P)
The sum of present value of all the payments to be made during the entireterm of
the annuity.
Annuities may be illustrated using a time diagram. The timediagram for an ordinary annuity (i.e.,
payments are made at the end of the year) is given below.
Example 2:
To start a business, Jake wants to save a certain amount of money atthe end of every month
to put in an account providing 2% interest compounded monthly. His estimated start-up capital is
P150,000. If he wants to start a business in 1.5 years, how much monthly deposit must he put into
the account?

SOLUTION:
Since the deposits are made at the end of every month, then this Is an example of an ordinary
annuity. Use FORMULA 1 with:

Example 3:
Suppose Mrs. Manda would like to deposit P3,000 every month in a fund that gives 9%,
compounded monthly. How much is the amount of future value of her savings after 6 months?
Example 4.
Activity 1: Question and Answer
Directions: Answer the questions briefly. Write your answers in a separate sheet of paper.

1. Differentiate Simple Annuity and General Annuity?

2. What is an Ordinary Annuity?
3. What is the formula in finding the future value of an ordinary annuity?Identify each
variable represents.
4. What is the formula in finding the present value of an ordinary annuity?Identify each
variable represents.
5. What is the periodic payment formula of an annuity?

Activity 2. Answer as indicated. Write your answers in a separate sheet of paper.

1. Find the future value of an ordinary annuity with a regular payment ofP1,000 at 5%
compounded quarterly for 3 years.
2. Find the present value of an ordinary annuity with regular quarterlyopayments
worth P1,000 at 3% annual interest rate compounded quarterly at the end of 4
years.

Activity 3. Complete the sentence below. Write your answers on a separate sheet of paper.
1. is a sequence of payments made atequal
(fixed) intervals or periods of time.
2. is the sum of present value of allthe
payments to be made during the entire term of the annuity.
3. is an annuity where the paymentinterval is
the same as the interest period.
4. is a type of annuity in which thepayments
are made at the end of each payment interval.
5. is the sum of future values of allpayments
to be made during the entire term of the annuity.

Activity 4. Solve for the following problems. Answer as indicated. Write your answers in aseparate
sheet of paper.
1. Mr. Ribaya paid P200,000 as downpayment 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 ofhis car?
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% compoundedmonthly, how much will
her money be at the end of 6 years?
3. Paolo borrowed P100,000. 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.
 LESSON 2. General Annuity
Objectives:
At the end of the lesson, the learner will be able to:
1. Illustrate simple and general annuities
2. Distinguish between simple and general annuities
3. Computes the future value, present value and periodic payment of simple annuity

In the previous lessons, you learned to illustrate a Simple Annuity and you solve the present
and future values of simple Annuity. You also compute for the periodic payment of simple annuity.
As well as solve problems involving real lifesituations on simple Annuities.

GENERAL ANNUITY
A GENERAL ANNUITY is an annuity where the length of the payment interval is not the same
as the length of the interest compounding period.
GENERAL ORDINARY ANNUITY
A general annuity in which the periodic payment is made at the end of thepayment interval.

Examples of General annuity:

Monthly installment payment of a car, lo or house with an interest ratethat is compounded
annually.
Paying a debt semi-annually when the interest is compounded monthly.

Example 1.
Example 2.
Example 3.

Find the market value of each offer.

We illustrate the cash flows of the two offer using time diagram.

Mr. Cruz’s Offer: We first compute for the present value of a general annuity with quarterly payments but
with annual compounding period at 5%.
Solve the equivalent rate, compounded quarterly of 5% compound annually.
Activity 1: Question and Answer
Directions: Answer the questions briefly. Write your answers on a short bond paper.

1. Differentiate General Annuity and General Ordinary Annuity.

2. What is a General Ordinary Annuity?
3. Express the process in finding the Present and Future value of General Ordinary Annuity.
4. What is the formula in finding the Fair Market Value?
5. Express the process in finding the Fair Market Value.

Activity 2. Answer as indicated. Write your answers on a short bond paper.

Activity 3. Complete the sentence below. Write your answers on a short bond paper.
1. is an annuity where the length of the payment interval is not the same as the length of the
interest compounding period.
2. is general annuity in which the periodic payment is made at the end of the payment
interval.
3. is a term that refers to payments received or payments or deposits made.
4. of a cash flow on a particular date refers to a single amount that is equivalent to the value of
payment stream at that date.
5. installments payment of a car, lot or house with an interest rate that is compounded
annually.

Activity 4. Solve for the following problems. Answer as indicated. Write your answers on a short bond
paper.
1. Mrs. Remoto would like to buy a television (TV) set payable for 6 monthsstarting at the
end of the month. How much is the cost of the TV set if her monthly payment is P3,000 and
interest is 9% compounded semi- annually?
2. Kat received two offers for investments. The first one is P150,000 every year for
5 years at 9% compounded annually. The other investment scheme is P12,000 per
month for 5 years with the same interest rate. Which fair market value between these
offers is preferable?
LESSON 3. Deferred Annuity
Objectives:
At the end of the lesson, the learner will be able to:
1. Illustrate a Deferred Annuity
2. Find the present value of a deferred annuity
3. Calculate the period of deferral of a deferred annuity

In the previous lessons, you learned the methods of solving the value of money under General
annuities. You were able to find the future and present value of general annuities and compute the
periodic payment of a general annuity. And you also solve for the fair market value of a cash flow
stream that includes an annuity. As well as solve problems involving real life situations of General
annuities.
In this lesson, you will explore annuities whose payments do not necessarily start at the
beginning or at the end of the next compounding period.For instance, for certain employee who will
retire in 20 years, his pension will only start after 20 years.

DEFERRED ANNUITY
A DEFERRED ANNUITY is a kind of annuity whose payments (or deposits)start in more than
one period from the present.
PERIOD OF DEFERRAL
The time between the purchase of an annuity and the start of the paymentsfor the deferred
annuity.

ILLUSTARTION
Example 1.
A certain fund is to be established today in order to pay for the P5,000 worth of monthly rent
for a commercial space. If the payments for rent will start next year and the fund must be sufficient
to pay for the monthly rental for 2 years, how much must be deposited at 2.5% interest
compounded monthly?

SOLUTION:
Consider a 3-year timeline for the illustration. Since the payment will start next year, then the
first year (12 compounding periods) is known as the period of deferral.
The payment will start at the end of the 12th month and end at the end of the 36th month.
 Notice that there are two stages in finding the present value of a deferred annuity: (1) find the
value of the payment at the start of the payment period by using the formula for the present value of
an annuity, and then (2) fin the value of the amount to be obtained at the start (or time 0) by using the
formula for the present value of a single amount given in the formula of the resent value of a deferred
annuity.
If the period is k-years, you call the annuity a k-year deferred annuity
Activity 1. Answer the questions briefly. Write your answers on a short bond paper.
1. Differentiate Deferred Annuity and Period of Deferrral.
2. What is a Deferred Annuity?
3. What is a period of deferral?
4. What is the formula in finding the present value of a deferred annuity?Identify each
variable represents.
5. Draw the time diagram for a deferred annuity.

Activity 2. Answer as indicated. Write your answers on a short bond paper.

1. Find the present value of a 2-year deferred annuity at 4% interestcompounded quarterly with
payments of P1,000 made every quarter for 3 years.
2. Find the present value of a 3-year deferred annuity with regular paymentsof P10,000
compounded annually at an interest rate of 3%.

Activity 3. Solve for the following problems. Answer as indicated. Write your answers on a short bond
paper.
1. Mariel purchased a smart television set through the credit cooperative of their company. The
cooperative provides an option for a deferred payment. Mariel decided to pay after 2 months of
purchase. Her monthly payment is computed as P3,800 payables in 12 months. How much is the
cash valueof the television set of the interest rate is 12% convertible monthly?
2. Melvin availed of a loan from a bank that gave him an option to payP20,000 monthly for 2
years. The first payment is due after 4 months. How much is the present value of the loan if the
interest rate is 10% converted monthly?
3. Quarterly payments of 300 for 9 years that will start 1 year from now, what is the period of
deferral in the deferred annuity?

Activity 4. Choose the letter of the correct answer and write on a short bond paper.
1. It is an annuity where the payment interval is the same as theinterest period.
a.) Simple Annuity b.) General Annuity
c.) Annuity Certain d.) Contingent annuity

2. It is a sequence of payments made at equal (fixed) intervals orperiods of time.

a.) Future Value of an annuity b.) Present Value of an annuity
c.) Annuity d.) Periodic Payment

3. The sum of future values of all the payments to be made duringthe entire term of annuity
a.) Annuity b.) Present Value of an annuity
c.) Future Value of an annuity d.) Periodic Payment

4. The sum of all present values of all the payments to be madeduring the entire term of the
annuity.
a.) Periodic Payment b.) Time of an Annuity
c.) Future Value of an annuity d.) Present Value of an annuity

5. Find the future value of an ordinary annuity with a regular payment of P1,000 AT 5%
interest rate compounded quarterly for
3 years.
a.) P12,806.63 b.) P12,860.36
c.) P12,860.63 d.) P12,806.36
 6. Find the present value of an ordinary annuity with regular quarterly payments worth
P1,000 at 3% annual interest ratecompounded quarterly at the end of 4 years.
a.) P15,024.31 b.) P15,204.31
c.) P15,402.31 d.) P15,420.31

7. It is a term that refers to payments received (cash inflow).

a.) General Annuity b.) General Ordinary Annuity
c.) Cash Flow d.) Annuity Certain

8. It refers to a single amount that is equivalent to the value ofthe payment stream that shall
date.
a.) Future Value of a general annuity b.) Present Value of a general annuity
c.) Fair market value d.) Periodic Payment

9. What is the other term for fair market value?

a.) Cash flow b.) Present Value of a general annuity
c.) Future Value of a general annuity d.) Economic Value

10. A teacher saves P5,000 every 6 months in the bank that pays 0.25% compounded
monthly. How much will be her savings after10 years?
a.) P101,197.06 b.) P101,179.06 c.) P101,971.06 d.) P101,791.06

11. It is an annuity that does not begin until a given time intervalhas passed.
a.) Period of Deferral b.) Deferred Annuity
c.) Present value of a deferred annuity d.) Contingent annuity

12. It is a time between the purchase of an annuity and the start ofthe payments for the
deferred annuity.
a.) Period of deferral b.) General Ordinary Annuity
c.) Deferred annuity d.) Present value of a deferred annuity

13. Melvin availed of a loan from a bank that gave him an option topay P20,000 monthly for
2 years. The first payment is due after 4months. How much is the present value of the loan if the
interest rate is 10% converted monthly?
a.) P422,795.78 b.) P422,759.78 c.) P422,579.78 d.) P422,597.78

14. Annual payments of P2,500 for 24 years that will start 12 yearsfrom now. What is the
period of deferral in the deferred annuity?
a.) 12 periods b.) 10 periods
c.) 11 periods d.) 13 periods

15. Semi-annual payments of P6,000 for 13 years that will start 4years from now. What is
the period of deferral in the deferred annuity?
a.) 8 semi-annual intervals b.) 6 semi-annual intervals
c.) 5 semi-annual intervals d.) 7 semi-annual intervals