CHAPTER 7, 4 Mn, $ 200 sant THE PED che al an a periodically, and in equ; ®) Lesson Proper (8) Present de efinition of terms. equal ao? Annuity ~ a sequence of payments made at equ ed) interval OF Periods of ting on successive payments * Payment interval - the time between suc Pay Atmulties may be classtiod in ene a ral ee | Any sete. | Soe tina. per, fatten | Be sly nie’ same as i ; — | the interest period | Ordinary Anm } (or Annuit Immediate)” A type of annuity in which the payihtis the payments are made at a are made the end of each payment in- terval * Term of an annuity, a 70 Regular or Periouie 7 Amount (Future Value) of an annuity, p tiade duting the eatce 4 i 7 yments to ‘ : Sm of Future values of al the pay Present value of an annuity, p it sur during the entire term of the annuity ™ Of Present values of all the paymnents to be made ‘ment, R- Scanned with CamScannerAnnuity py, WOME ANd Cons Thus, untes thy rw: and a a . ise. an Annuity Gor are made at the ot ) Allow the stuc yy alk HES £0 Provide yoy 2, Teal Pd of annuity ak : jaan a Pension payments in the time diagrams below. = = 3 Ora ag k the students to illustrate certain ‘examples of annuities using time diagrams. | An installment payment of an appliance of P3000 ‘every month for 6 months P F 3,000 3,000 3,000 3,000 3,000 3,000 0 1 2 3 a 3 6 | «———— 6 months ——_- | Periodic payment 2 = 3,000 | Term t = 6 months Payment interval = 1 month (/ Ordinary Annuities i Unless mentioned otherwise, ‘That is, the regular payments all annuities discussed in this lesson are ordinary annuities. are assumed to be done at the end of the payment period. “Lt the students illustrate and distinguish between simple and general annuities by providing * the students illust manne sigs have a tie diagram frit ea flow as shown below, The annuities Lath simple eral it e as the interest is a and be in a simple annuity the payment interval is the cm e de e a hi aay is thi at annuity (he payment interval is not the same as the int d, tile in a gene! Scanned with CamScannerCHAPTER 7. ANNU pp, hy 02 F P noe . som oat the end of ont for an applian o pstallment payee fiance at the end of for an appliance st thet of hy Ry ho next lesson) annuity immediate, © Example of a simple annuit erest compounded monthly Imient payment oneral annuity - Install to be discussed! in wit + Example of a ge with interest conowndet anal ( (future value) of @ vo eave 73,000 at the cael oF CCH MOM, fp se How much is the AMOUt OF ftp, imple (f) Discuss how to compute the amount EXAMPLE 1. Suppose Mrs. Remoto woul like six months, in a fund that gives 9% compounded monthly value of her savings after 6 months? Solution. Given: = P3,000 term t= 6 months interest rate per annum i?) = 0.09 number of conversions per year m = 12 interest rate per period j = oe = 0.0075 amount (future value) at the end of the term, F Find: (1) Mlustrate the cash flow in a time diagram 3,000 3,000 3,000 3,000 3,000 3,000 0 1 2 3 4 5 6 6) (2) Find the future value of all the payments at the end of the term (t= 3, = 3,000 3,000 3, ~ 3,000 3, 3,000 3,000 3,000__3,000__3,000 3,000 OT Be Bd Baden ap Ours 3, - 3,000(1 + 0.0075) 3,000(1 + 0.0075)? 3,000(1 +.0.0075)* 5, 000(1 + 0.0075)* 3, eh +0.0075)° | Scanned with CamScannerP (3) Add all the future values obtained from the previous step. 3,000 = 3,000 (3,000)(1 + 0.0075) = 3,022.5 (3,000)(1 + 0.0075)? = 3,045.169 (3,000)(1 + 0.0075)° = 3.068.008 (3,000)(1 + 0.0075)* = 3,091.018 (3,000)(1 + 0.0075)* =_3, 114.20 F = 18,340.89 Thus, the amount of this annuity is P18,340.89. Scanned with CamScannern Payment + Present Value Cash Value = Dov 200, 000 + 753, 702. 20 12.20 {The cash price of the car is P953,702.20. ees to pay the principal plus interest by » Y Paying ed P100 000. I + should be his annual payinent if jg, EXAMPLE 5. Paolo borrowe ch year for 3 years, What an equal amount of mone’ is 8% compounded annually? Solution. Given: P = 100,000 i) = 0.08 m=1 j= 0.08 t= 3 years n= mt = 1(3) =3 periods Find: periodic payment R ‘The cash flow of this annuity is illustrated in the time diagram given below P= 10,000 Scanned with CamScanneray a 1-(24+3)" since P= REDE nen Rae = ri ri 100,000 = Too 0s = 38,803.35 Thus, the man should pay 38,803.35 every year for 3 years. | Formulas | Rs patra} Future Value of an Ordinary Annuity: Faig= lo | ~-(1+j)™" | Present Value of an Ordinary Annuity: P= Ray = ne \ \ | a ity i ity Ww! ayments are made at the en Remember that an ordinary annuity is an annuity where pay a _of each period ratwerl = raf the following ondinary anmiils Scanned with CamScannerx 29: General Annuity AME: 180 minutes xG OUTCOME(S): At thy “eral annuitic end of the wri » and calculate the fap OUTLINE: sfQUISITE SKILLS: Knomicdg of Sinn i Annuity pit PMENT OF THE Lesson swtuction/ Motivation Compounded monthly = — compounded anmnally i draw 3 papers. For a given time period, ith the most number of correct answer is with the highest munber of comet anseurs./ Compute for equivalent rates, The group wit (be winner. You may also consider the fastest group Scanned with CamScannera “un, an ts. This payment schon & done periodically, and in equal amount be Feats by installment ane don ally, Mnuity, (By Lesson, Proper (9) Present definition of terms. . on : xed) intervals or periods of a Annuity ~ a sequence of Payments made at equal (fixed) intery Pp f time sive payments * Payment interval - the time between successive pay Annuities may be Classified in different ways, as follows. Annuitios Simple Annuity General Annuity An annuity where-the pay. anna Sie i ‘ment interval is the same as ment interval jg the interest period Ordinary Annuity Ordinary Anmity (or Annuity Immediaug)” Tee i A type of annuity in which | 4 type Snnuity in which tl a ‘he Payments are made at | the Payments are Made at the end of each payment in- beginning of each Payment terval aera i Conti, ont huity An annuity? in which the definite (or length of ti indeterminate) ime 3 Scanned with CamScanner Scanned with CamScanner(B) Lesson Proper (a) Let the students recall th i general annuity: «definition of general emia bs tho ere erval is not tb yment int ¢ General Annuity ~ an annnity where the pay compounding period « General Ordinary Annuity - @ sene! the end of the payinent interval yinent i | nich the periodic F mar annuity in which (he P ake ay The lesson (A Teaching Tip j The terms used in simple will focus on general ordinary meanings in general annuity. anmuity have the same annuity only: (b) Allow the students to provide real life examples of general annuity: Examples of Annuity: monthly installment payment of a car, lot oF house with an in- ually when the interest is terest rate that is compounded annually; paying a debt semi-annualy compounded monthly (c) Allow the students to lustrate the cash flow of a general annuity in a time diagram. [Annuity a aR RR o 2 2 38 4 «5 - on (A Teaching Tip Let the students observe that the time diagram is similar to a simple ordinary annu- ity. The main difference is that the payment i i atest ent 2 Si i Me eee pay interval is not the same as the interest Scanned with CamScanner© OF general Ottlinag ¥ Annuity a = RU jn J here Ris the regular Payment, Nn ji . i is the couivatent interest rate | dis v | nis the Uuttnber of Pp a Per Paymneny ftervad, ang Tits, PLE 1. Mel ¢ ‘arted to deposit p o ome How much Will be in, th quarterly 00 Monthly ina fund thar Pays 6% Ne fund after 45 years? com, Solution. Given: R = 1,000 12(15) iM) 9.06 n = 180 payments m=4 Find: F nner Scanned with CamScai26 (1) Since payments are monthly, the interest rate of 65 monthly. 10 its equivalent interest rate that is compounded mor Recall the procedure shown in Lesson 28: ~ [(1.015y/? (1.015)' = 1 0.001975 75 or O.AITS%. using the compute | ‘Thus, the interest rate per monthly payment interval is 0.0049 (2) Apply the formula in finding the future value of an ordinary annuit ‘equivalent rate = pla | F i (1 +0.004975)!™ — 1 | | = 1,000" 9.001075 | | = 290,076.28 | ‘Thus, Mel will have P290,076.28 in the fund after 20 years | ao | EXAMPLE 2. A teacher saves P5,000 every 6 months in a bank that pays 0.25% compounded monthly. How much will be her savings after 10 years? Solution. Given: R= P5,000 n= 2(10) = 20 payments 0) = 0.25% = 0.0025 m=12 Scanned with CamScannercash flow for thi . Show isthe ra el . elon 5,000 5, = 7.000 5,000 ; 2 ny 5.) 1) Convert 0.25% compouniey Monthly te ‘ payment interval, 7 (Aoon20833) 4172 i) TT = (.00020435)9 — 5 i) T= 0.00125063 sanual Payment interval is 0 00125063 or 0.1259 ; M or 0.125% @) Apply the formula in nding the present eu ee ding ‘at value of au ordinary annuity using the computed Po pGtin-1 a = 5,000 (4 +.0.00125063)2 0.00125063 = 101,197.06 Qo (©) Diseuss how to compute the present value ofa general ordinary ( Teaching Tip As with the future value formula, the foruula forthe present value of a general annual immediate involves an extra step: find an cquivalent rate j with the same compounding Detiod as the payment interval. annuity Scanned with CamScannerCHAPTER 7 | Present Value of an Ordinary Annwity | p XK | H $ " | o1 |The present value of an ordinary | Where 2 is the regular pavinent, ervat rate per payment J is the equivalent is the number of payments Kat. He agnees (0 pay the principgy + from Jn anowey did he borrows hy EXAMPLE 3. Ken borromnl an amount of 1 . inten, interest by paying P38,073.76 each year for 3 years: How nie is 8% compounded! quarterly? Solution, ea: R= P38, 973.76 n= 3 payments Find: present value P ‘The cash flow for this problem is shown in the diagram below, R= 38,973.76 R= 38,973.76 0 1 2 Scanned with CamScannergai eal Che proce hogy (ey (8). Ao) 7 yap the forma in Eading the pray value of © cquivalent rate j = 0.082432 Of an onde aunty Using the computed a ‘0 uy a eleviion (TV) set payable monthly for 6 nonths starting at the end of the mouth, Howser TV set if her ‘tuonthly payment is P3,000 and interest is 9% Solution. Given: R= 3,000 i?) = 0.09 n= 6 payments Find: cost (present value) at the beginning of the tem P Scanned with CamScannerCHAPTER 7, , 0 aymnent interval, Aya, Q) ¢ ‘alent interest rate for cach pays ain To : Convert the given to ite equivalent i Procedure shown in Lesson 28. n=F 2 \ Ot oy (120 i@) n(i+8) =Pllt> 2 2 12 09 (12) 0.09 (+45) 2 (1+ 5 B f(12) 5)2 (: 4 ) = (1 +0.045) 12 2 14 ek 11.645) 12 ;(12) a (1.045)'/6 — 1 12 i(12) <> = 0.00736312 = j 12 Thus, the interest rate per monthly payment interval is 0.00736312 or 0.736312 (2) Apply the formula in finding the present value of an ordinary annuity using the comp equivalent rate j = 0.00736312, - ;)-" P=R ( ao) J 1~ (1 + 0.00736312)-6 = 3,000 = 17,545.08 Thus, the cost of the TV set is P17,545.08 will now apply the “oncepts of present and future values to solve problems about cash | Scanned with CamScanner“ 2 Anni 7 ‘Thus, fae so ina Tula cat Mt Anny and a Any Con 1S Set ee MONOT ey ‘aphasia in Grade PM anarte anaticn. SO le A the eu be cach in) Allow the students t0 pro ae oe of. Annuity fee, ete. eA ton See fo Mare cera cxamples of annuities using time diagrams. An installment payment of an appliance of P3000 every month for 6 months - F 3,000 3,000 3,000 3,000 3,000 3,000 ° ' 2 3 4 5 6 Kk 6 months ——————# Periodic payment #2 = 3,000 Term t = 6 months Payment interval = 1 month | Ordinary Annuities Unless mentioned otherwise, That is, the regular payments are assumed to be d all annuities discussed in this leson are ordinary annuities. lone at the end of the payment period. | (st the stents ilusrate and stings between simple and general annuities by providing amples, EAL simple and general annuities have © un diference is that in a simple am pees | tad wile in a general annuity the paste! int cs] Scanned with CamScanner 1 time diagram for its cash flow as showm below. The ity the payment interval is the same as the interest the same as the interest period, Scanned with CamScannerte lor Ue period Hog "itera ¥4 computed r + Io yey a ral jw interest rates think WL can wait etn ni " er than pay now es jw with interest ] “oe With We Need e oN 30: Deferreg Anni iE FRAME: 2 honry so NING OUTCOME(S): ay 4 he end of 1 he J of deferral of a deferred annuity, mad ry Lesson, the i mE s0N OUTLINE: u 1 peferred annnity p ront valve of deferred anny a Period of deferral of @ deferred annuity pREREQUISITE SKILLS: Kuowledge of Exponential Functions (A) Introduction, / Motivation Ask the students what they 'Y would like to do on their 18th birthday, following situation. Then describe to them th Scanned with CamScannerty i uit s type of ann Disenss some examples of this 1YP 4 to start paying month), as 0 pure ay offering its cheats © F 3 months © A credit their choic ase now and start paving ay, A real estate agent is urging @ 2 1 is ready for ore when the condominian ey so that he can withdr,, Rb ra income ® » the day of his re} A worker who has gained his money monthly starting ©” (B) Lesson Proper (a) Review definition of terms. - a Annuity ~ a sequence of pasients made at equal(fixed) intervals or periods of time « Annuity Immediate or Ordinary Annuity - # (Pe are made at the end of each period » of annuity in which the payments (b) Present definition of terms. Deferred Annuity - an annuity that does not begin until a given time interval has passed # Period of Deferral - time between the purchase of an annuity and the start of the payments for the deferred annuity (c) Review how to calculate the present value of uity immediate or ordinary y Re present value of an ann di iy annuit; Scanned with CamScanner/ “90 rate 8 the number og Pe ANS haber of nr review. Suppose Mr. Gray, wan oar starting at the eng Of the not so is P25 pe at ypsanent # P2500 and inten, is He decider w A the cet ular y solution. Given: R= 2,500 i) = O.09 Find: P The interest per period is j 9 m = yy = 0.0075, The number of payments is n mt = 12(1) = 19, The present value of the annuity ig = 4 = + 0.0075)-12 P= Ran = 2,500 ae ee iTS = 28,587 95, Thus, the cost of the cellular Phone now is 28,587.28. (@) Define deferred annuity and illustrate. Give the formula for finding Scanned with CamScannerane » AO, yy Derive the formula for gate procedure from the ‘ing Previous ex, Consider he following time . ean of deferral. rere a ANCA payment Nt Mens of Fay, Ate Dhaced in Be reine, 0 7 ” k . — oo R Ren "Present Value of a b, eferred Anat Nnuity oe P 2 , 2 = z R Po Re Ry= RRA grt f] where is the regular payment, 7 is the interest rate ber period, nis the number of payments, and k is the number of conversion Periods in the period of deferral (or number of artificial payments) i h 2 ded to buy a pension plan for i irthday, Mr. Ramos deci : ; EXAMPL®&1. On his 40th be vis 000 quarterly for 5 years starting 3 nae oer ‘ should he make on his 40th birthday to pay ayment $I _ x compounded quarterly? This plan will iba 60th birthday. What one-tim 5 pension plan, if the interest rate Is Scanned with CamScanner80 ) a 1 2 Phus. the [ yt value of the deferred annuity cast be solved as jus. the Po a aay _ pice +p" Rag = 2—— ; 4 —(1 +0.02)~89 a 40.02) 1" — 10,000: ain (0 = Rageal »,0002 =10.0) 0.02 sue of these monthly pensions is P33,538.38. i Therefore, the present va a deferred payment. option for the purchase of credit card company offers with monthly payments of P4,000 for ns to buy a smart television set s. The payments will start at the end of 3 months. How much is the cash price of the 4. if the interest rate is 10% compounded monthly? EXAMPLE 2. Scanned with CamScanner