ANNUITIES

Annuities are sequence of fixed payments made at equal intervals

or periods of time subject to fixed compound interest rate.
Example: Rent payment, Pension, Monthly payment of car loan.

Difference between Compound Interest and Annuity

The type of interest used in an Annuity is Compound Interest. To
avoid confusion between the two, below are examples showing the
difference between problems in a pure Compound Interest environment
and the other with Annuity.
1. Mr. Ramos deposits Php 50,000 that earns 5% compounded
annually. What would be the amount after 10 years?
- This problem is about the Maturity Value of a Compound
Interest because Php 50, 000 will only be deposited once.

2. Mr. Ramos deposits Php 50,000 at the end of each year for 10 years
in an investment account that earns 5% per year compounded
annually. What would be the amount after 10 years?
- This problem involves Annuity because there is a fixed
payment which is Php 50,000 paid at the end of each year.

In general, annuity involves a series of payments on regular

intervals while the compound interest only involves one
payment/deposit made at the beginning of the term.
 Different Types of Annuities

Annuity

Annuity Annuity
Certain Uncertain

Simple General
Annuity Annuity

Simple Simple Deferred General General

Ordinary Annuity Annuity Ordinary Annuity
Annuity Due Annuity Due

Types of Annuity
A. Annuity Certain – Annuities that are payable for a definite duration. It begins
and ends on a definite or fixed date.
Example: Monthly payment for a house loan

Kinds of Annuity Certain:

1. Simple Annuity – is an Annuity where the interest conversion period
is equal or the same as the payment interval.
Example: A deposit of Php 10,000 was made at the end of every three
months to an account earns 6% interest compounded quarterly

2. General Annuity – is an annuity where the interest conversion period

is unequal or not the same as the payment interval
Example: Payments are made at the end of each month for a loan that
charges 5% interest compounded semi-annually

B. Annuity Uncertain – Annuities that are payable for an indefinite duration.

Example: Insurance
Classifications of Simple Annuity
1. Simple Ordinary Annuity – A simple annuity in which the periodic
payment is made at the end of each payment interval
2. Simple Annuity Due – A simple annuity in which the periodic payment is
made at the beginning of each payment interval
3. Deferred Annuity - an annuity where the first payment is delayed for a
certain number of periods.

Classification of General Annuity

1. General Ordinary Annuity – A general annuity in which the periodic
payment is made at the end of each payment interval
2. General Annuity Due – A general annuity in which the periodic payment
is made at the beginning of each payment interval

Solving for the Present and Future Value of a Simple Ordinary Annuity
Future Value – Also known as Maturity Value. It is the total accumulation
of the payments and interest earned.
Present Value – is the principal that must be invested today to provide
the regular payments of an annuity

Formula for Future Value and Present Value of a Simple Ordinary

Annuity
𝒓 𝒏𝒕 𝒓 −𝒏𝒕
(𝟏+𝒏) −𝟏 𝟏−(𝟏+𝒏)
𝑭𝑽 = 𝑷 [ 𝒓 ] 𝑷𝑽 = 𝑷 [ 𝒓 ]
𝒏 𝒏

Where, 𝐹𝑉 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒

𝑃𝑉 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒
𝑃 = 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑟 = 𝑟𝑎𝑡𝑒
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑/𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝑡 = 𝑛𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑤𝑖𝑙𝑙 𝑏𝑒 𝑚𝑎de
Examples:
1. Clara deposits Php50,000 at the end of each year for 10 years in an
investment account that earns 5% per year compounded annually.
What would be the amount after 10 years?

2. Jose works very hard because he wants to have enough money in his
retirement account when he reaches the age 60. He wants to
withdraw Php 36,000 every end of 3 months for 20 years starting 3
months after he retires. How much must Jose deposit at retirement
at 12% per year compounded quarterly for the annuity?
3. How much should be deposited in an account at the end of each
quarter in order to have Php 100,000 after 5 years at 8%
compounded quarterly?

4. A cellular phone is purchased with Php 5,000 down payment and the
balance will be paid at Php 1500 at the end of the month for one
year. What is the cash price of the cellular phone if the money is
worth 12% compounded monthly?
5. You buy a computer whose cash price is Php 150,000. If no
downpayment is required and money is worth 18% compounded
monthly, what is your fixed monthly instalment if it is payable in 3
years?