ST.

VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

COO – FORM 12

SUBJECT TITLE: MATH OF INVESTMENT

INSTRUCTOR: MA. DEL MAR G. SARGADO, LPT
SUBJECT CODE: ELEC 1 – MI

FINAL MODULE

TOPIC 1: ANNUITY DUE/ ANNUITY IN ADVANCE

Learning Objectives:
At the end of this topic, the student would be able to:
1. Discuss the concept of an annuity due
2. Compute for the present value and periodic payment of an annuity due
3. Compute for the future value and periodic payment of an annuity due

Notes:

1.1 Basic Concept of an Annuity Due/ Annuity in Advance

An annuity due or sometimes called annuity in advance is one for which the first payment
occurs immediately. It is also defined as an annuity in which payments are made at the
beginning of each period.

1|Page
 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

Illustration: Payment period of an Annuity Due

1.2. Present Value of an Annuity Due

The present value of an annuity due is the sum of all discounted value of several payments
due at the beginning of the term, with the first payment to be made at the beginning of a
period.

To get the PV of an Annuity Due, use the following formula:

(𝟏−𝒏)
𝟏− ( 𝟏 + 𝒊 )
𝑨=𝑹 ×[ + 𝟏]
𝒊
Periodic payment:
𝑨(𝒊)
𝑹=
𝟏 − (𝟏 + 𝒊)(𝟏−𝒏) + 𝒊

Where,
n = number of period
i = interest rate
R = annual payment

Illustration 1: JC intends to save a small portion of his salary in a bank account every year for
3 years. The yearly amount of P10, 000 will be deposited at a bank that gives interest at 10%
every year. The first payment is to be made at the start of the first year, compute the Present
Value of Annuity Due.

Given:
R = 10,000

t=3 n = mt = 1(3) = 3

j = 0.10

𝑗 0.10
m=1 i= = = 0.10
𝑚 1

(𝟏−𝒏)
𝟏− ( 𝟏 + 𝒊 )
𝑨=𝑹 ×[ + 𝟏]
𝒊

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 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

(𝟏−𝟑)
𝟏 − ( 𝟏 + . 𝟏𝟎 )
𝑨 = 𝟏𝟎, 𝟎𝟎𝟎 × [ + 𝟏]
. 𝟏𝟎

𝑨 = 𝑷 𝟐𝟕, 𝟑𝟓𝟓. 𝟑𝟕

Illustration 2: A P26,500 debt bears interest at 23% compounded semi-annually. It is to be

repaid in installments at the beginning of every 6 months for 5 years and 6 months. Find the
semi-annual payment.

Given:
A = 26,500

t = 5 years and 6 months = 5.5 years n = mt = 2(5.5) = 11

j = 0.23

𝑗 0.23
m=2 i= = = 0.115
𝑚 2

𝑨(𝒊)
𝑹=
𝟏 − (𝟏 + 𝒊)(𝟏−𝒏) + 𝒊

𝟐𝟔, 𝟓𝟎𝟎(𝟎. 𝟏𝟏𝟓)

𝑹=
𝟏 − (𝟏 + 𝟎. 𝟏𝟏𝟓)(−𝟏𝟎) + 𝟎. 𝟏𝟏𝟓

R = 3,915.62

1.3 Future Value of an Annuity Due

The future value of an annuity due is the sum of the accumulated values of the payments at
the end of the term, with the first payment to be made at the beginning of a period.

To get the FV of an Annuity Due, use the following formula:

Amount:
𝒏+𝟏
( 𝟏 + 𝒊 ) −𝟏
𝑺= 𝑹 ×[ − 𝟏]
𝒊

Periodic payment:

𝑺(𝒊)
𝑹=
(𝟏 + 𝒊)(𝒏+𝟏) −𝟏−𝒊

Where,
n = number of period
i = interest rate
R = annual payment 3|Page
 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

Illustration 1: JC intends to save a small portion of his salary in a bank account every year for
3 years. The yearly amount of P10, 000 will be deposited at a bank that gives interest at 10%
every year. The first payment is to be made at the start of the first year, compute the Future
Value of Annuity Due.

Given:
R = 10,000

t=3 n = mt = 1(3) = 3

j = 0.10

𝑗 0.10
m=1 i= = = 0.10
𝑚 1

𝒏+𝟏
( 𝟏 + 𝒊 ) −𝟏
𝑺=𝑹 ×[ − 𝟏]
𝒊

( 𝟏 + . 𝟏𝟎 ) 𝟑+𝟏 − 𝟏
𝑺 = 𝟏𝟎, 𝟎𝟎𝟎 × [ − 𝟏]
. 𝟏𝟎

𝑺 = 𝑷 𝟑𝟔, 𝟒𝟏𝟎

Illustration 2: What sum should be invested at the beginning of each quarter at 18%
compounded quarterly in order to have P45,000 in a fund 6 years from now?

S = 45,000

t = 6 years n = mt = 4(6) = 24

j = 0.18

𝑗 0.18
m=4 i= = = 0.045
𝑚 4

𝑺(𝒊)
𝑹=
(𝟏 + 𝒊)(𝒏+𝟏) − 𝟏 − 𝒊

𝟒𝟓, 𝟎𝟎𝟎(𝟎. 𝟎𝟒𝟓)

𝑹=
(𝟏 + 𝟎. 𝟎𝟒𝟓)(𝟐𝟓) − 𝟏 − 𝟎. 𝟎𝟒𝟓

𝑹 = 1,032.93

4|Page
 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

EXERCISES:

1. Zeus intends to save a small portion of his salary in a bank account every quarter for 6
years. The quarterly amount of P5, 500 will be deposited at a bank that gives interest at
4% every quarter. The first payment is to be made at the start of the first quarter,
compute the Present Value of Annuity Due.

2. A P95,300 debt bears interest at 6% compounded monthly. It is to be repaid in

installments at the beginning of every month for 2 years and 8 months. Find the monthly
payment.

3. Sue intends to save a small portion of his salary in a bank account every half-year for 9
years. The semi-annually amount of P8, 800 will be deposited at a bank that gives
interest at 9% every half-year. The first payment is to be made at the start of the first
half-year, compute the Future Value of Annuity Due.

4. Find the amount of an annuity due of 1,800 per quarter for 12 years at 6.2% converted
quarterly.

5. What sum should be invested at the beginning of each year at 9% compounded annually
in order to have P75,400 in a fund 6.1 years from now?

--- END OF TOPIC 1 ---

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 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

TOPIC 2: ADDITIONAL EXERCISES FOR ANNUITY DUE OR ANNUITY IN ADVANCE

1. Find the amount of an annuity due of 4, 800 per quarter for 15 years at 6%
converted quarterly.
2. At 12% converted semi-annually, find the present value of an annuity due of 60,000
per half year for 4.5 years.
3. How much is the annual payment of an annuity due whose present value is 75,000
payable annually for 10 years, money is worth 10%?
4. What is the present value at 8% converted semi-annually of an annuity due of 12,
000 payable semi-annually for 12 years?
5. Find the present value at 8% converted quarterly for 2.5 years, of an annuity due of
8,000 payable each quarter.
6. An annuity contract provides for the payment of 1,200 at the beginning of 6 months
for 8 years. If money is worth 7% compounded semi-annually, what is the amount of
annuity at the end of 8 years?
7. Jocelyn needs 50, 000 one year from now. If money is worth 10% compounded
quarterly, how much should be deposited at the beginning of each quarter?

6|Page
 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

TOPIC 3: COMPREHENSIVE EXERCISES FOR ORDINARY ANNUITY AND ANNUITY

DUE

Learning Objectives:
At the end of this topic, the student would be able to:
1. Compute for the comprehensive exercises under ordinary annuity; and
2. Solve for the comprehensive exercises under annuity due.

EXERCISES:

1. La Lisa intends to save a small portion of his salary in a bank account every year for
2 years. The yearly amount of P19, 000 will be deposited at a bank that gives
interest at 19% every year. The first payment is to be made at the end of the first
year. Compute the Present Value of Ordinary Annuity.

2. What sum will be paid at the end of each month for 7 years and 9 months, if the
present value is P52,200 and interest is paid at 11% compounded monthly?

3. Suppose Mrs. Gaugano would like to know the present value of her quarterly deposit
of 32,000 when interest is 9.3% compounded quarterly. How much is the present
value of her savings at the end of 6 months?

4. What must be deposited every half-year in a fund paying 13.6% compounded semi-
annually in order to have P50,000 in 9 years?

5. In order to save for her high school graduation, Jennie decided to save P800 at the
end of each quarter. If the bank pays 2.2% compounded quarterly, how much will
her money be at the end of 6 years?

6. Jisoo started to deposit 12,000 monthly in a fund that pays 5.5% compounded
monthly. How much will be in the fund after 6 years?

7. A P25,500 debt bears interest at 19.5% compounded quarterly. It is to be repaid in

installments at the beginning of every 3 months for 4 years and 9 months. Find the
quarterly payment.

8. What sum should be invested at the beginning of each month at 19% compounded
monthly in order to have P76,000 in a fund 9 years from now?

7|Page
 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

9. How much is the annual payment of an annuity due whose present value is75, 000
payable annually for 10 years, money is worth 10%?

10. At 12% converted semi-annually, find the present value of an annuity due of 60, 000 per
half year for 4.5 years?

8|Page
 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

TOPIC 4: AMORTIZATION AND SINKING FUND

Learning Objectives:
At the end of this topic, the student would be able to:
1. Understand the basic concept of amortization and sinking fund
2. Compute periodic payments for an amortized loan
3. Prepares an amortization schedule
4. Compute periodic deposits of a sinking fund
5. Determines the interest earned in a certain deposit
6. Determines the increase in fund on a certain deposit
7. Create the sinking fund schedule

Notes:

4.1 Basic Concept of Amortization and Sinking Fund

One of the most important and most common application of annuities in business is the
repayment of interest bearing debts. Amortization of loan is the repayment of a loan by
periodic payments, with the possible exception of the last payment, are equal in size. These
payments are often described as combined payments of principal and interest. When the
debt is paid in a series of periodic payments, pay the interest outstanding at the time the
payments are made and also repay a part of the principal. As the principal gradually
reduced by periodic payments, the interest of the unpaid balance decreases.

In the other hand, when a sum of money will be needed at some future date, a good
practice is to build up systematically a fund that will equal the amount of money desired at
the time it is needed. A sinking fund is an interest earning account into which periodic
payments are made for the purpose of accumulating a specific amount of money by a
certain date. The accumulated funds are typically used to acquire an asset requiring a
substantial capital expenditure, or to retire the principal amount of a debt.

Business use sinking funds to accumulate money for purposes such as acquiring new
equipment, facility expansion, and retiring financial obligations such as bond issues that
come due at the future date. Likewise, individuals can use sinking funds to save for a
college education, a car, a down payment on a house, or a vacation.

Definition of terms:
Amortization
 The gradual extinction of a debt, principal and interest, by sequence of equal periodic
payments or installment payments due at the end of equal intervals of time.

9|Page
 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

 The process of liquidating by installment payments at a regular interval a loan or

debt, including the interest charges.
Amortization Schedule
 This is a table that shows how much is applied to reduce the principal and how much
is paid for interest to show the outstanding balance after each payment period.
 A tabular presentation of the outstanding obligation at given period, the periodic
payment made every payment interval and the interest due for a given interest
period.
 A schedule which presents the distribution of the regular payment to the interest and
principal.
Sinking Fund
 The savings fund productively invested through equal periodic payments to
accumulate a definite sum of money within a specified period of time.
 Designed to accumulate a specific sum of money within a specific date.
 A fund established through a series of regular periodic deposits or savings intended
to discharge a liability or to accumulate a fund for a certain purpose.
 The accumulation of money to discharge an obligation due at some future date.
Sinking Fund Schedule
 The table showing the amount deposited before and after periodic deposit plus the
interest earned in every period.
 A table showing the gradual growth of money deposited to create a fund.
Outstanding balance
 The amount left to be paid at a certain payment interval

Periodic Payment (or Period Deposit)

 The amount paid or deposited at every payment or deposit interval.

4.2 Creating an Amortization Schedule

1. A P20, 000 loan at 18% compounded quarterly to be amortized every 3 months for 1
year. Find the quarterly receivable and construct the amortization schedule.

𝐴(𝑖) 20, 000 ( .045 )

𝑅= 𝑅= 𝑹 = 𝑷 𝟓, 𝟓𝟕𝟒. 𝟖𝟕
1 − ( 1 + 𝑖 )−𝑛 1 − ( 1 + .045)−4

Quarter Periodic Interest expense Amortization Present value

Payment
20, 000
1 5, 574.87 900 4, 674.87 15, 325.13

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 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

2 5, 574.87 689.63 4, 885.24 10, 439.89

3 5, 574.87 469.80 5,105.07 5, 334.82
4 5, 574.87 240.05 5, 334.82 0

The Outstanding balance

When the number of payments is too large, constructing an amortization schedule becomes
exhausting and tedious. However, the borrower and the lender can still determine the status
of any obligation by using shorter method.

Prospective method
This method is used when all payments are regular and equal. It uses the future history of
the debt. Thus, the future payments that have to be made can be easily known. With this,
the remaining liability becomes the present value of all the payments to be made. The
following formula will be used to find the outstanding balance(OB) or remaining
liabilities(RL) for this method.

Outstanding balance after the kth payment:

1 − (1 + 𝑖)−(𝑛−𝑘)
𝑂𝐵 = 𝑅 ( )
𝑖

Where: k = number of past payments

n - k = number of payments to be made

Interest paid (after the kth payment):

𝐼(𝑛−𝑘) = 𝑅 [( 1 − (1 + 𝑖 )− (𝑛−𝑘) ]

Principal repaid:

𝑃𝑅 = 𝑅 − 𝐼(𝑛−𝑘)

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 ST. VINCENT
COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291; Fax: (033) 5248081
Email Address: svcst_leganes@yahoo.com

4.3 Creating a Sinking Fund Schedule

1. A fund is created by making equal monthly deposits of P3,000 at 9% converted
monthly.
a. Determine the sum after half year
b. What is the amount in the fund after the 4th deposit?
c. Construct the sinking fund schedule for a 6-month period.

( 𝟏 + 𝒊 )𝒏 − 𝟏 ( 𝟏+ . 𝟎𝟎𝟕𝟓)𝟔 − 𝟏
𝑺=𝑹 𝑺 = 𝟑𝟎𝟎𝟎 𝑺 = 𝟏𝟖, 𝟑𝟒𝟎. 𝟗𝟎
𝒊 . 𝟎𝟎𝟕𝟓

Period Periodic deposit Interest income Increase in Future value

fund
1 3, 000 0 3, 000 3, 000
2 3, 000 22.50 3, 022.5 6, 022.5
3 3, 000 45.17 3, 045.17 9, 067.67
4 3, 000 68. 01 3, 068.01 12, 135.68
5 3, 000 91.02 3, 091. 02 15, 226.70
6 3, 000 114.20 3, 114.20 18, 340.90

EXERCISES:

1. Assume that a firm borrows P120,000 to be repaid annually for the next 5 years.
The creditor-bank stipulated a 12% interest. Compute the amount paid for each
year pertaining to the interest and principal. (Solve using an amortization
schedule)

2. A man needs P20,000 at the end of 3 years. He decides to put his savings every
six months in a fund that earns 9% converted semi-annually. Find:
a. The periodic deposits
b. The fund after the 4th deposit
c. The interest earned in the 6th deposit
d. Construct the sinking fund schedule

*** END OF FINAL MODULE ***

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