ANNUITY EXAMPLES:

ORDINARY ANNUITY 1. Find the amount of a 𝑃ℎ𝑝 5 000 ordinary annuity payable every
month at 9% compounded monthly for 3 years.
Def. An annuity is a sequence of equal payments made regularly (or
periodically).

Def. The time between successive payments is a payment interval. The

time between first payment interval and the last payment interval is
called the term of the annuity. The amount of each payment is referred 2. Ramos deposits 𝑃ℎ𝑝 10 000 at the end of each month in a bank
to as the periodic payment, denoted by 𝑅. which pays 5% compounded monthly. If no withdrawals are
made, how much could he expect to have after two years?
Note: The interval may be monthly, quarterly, semi-annually, and
annually. To compute for the present value of an ordinary annuity, we use
the formula:
Types of the annuity 1 − (1 + 𝑖)−1
• Annuity Certain – an annuity whose term is fixed. 𝐴 = 𝑅[
𝑖
]
• Contingent Annuity – an annuity whose term depends upon Where:
some uncertain events. 𝐴 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑛 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦
𝑅 = 𝑝𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
Annuities can be also categorized based on the timing of the payments.
𝑖 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑
• Ordinary annuity is an annuity for which the payments are made
𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
at the end of each interest period.
• Deferred annuity is similar except that the first payment is not EXAMPLES:
made at the end of the first interest period but later.
3. What is the present value of a 𝑃ℎ𝑝 30 000 annuity payable every
AMOUNT AND PRESENT VALUE
three months for 5 years at 10% compounded quarterly?
Given an ordinary annuity, we usually solve for the amount 𝑆, the
present value 𝐴, and the periodic payment 𝑅.

The formula for an ordinary annuity is given by:

4. A portable digital music player is purchased with a down
(1 + 𝑖)𝑛 − 1 payment of 𝑃ℎ𝑝 1 000 and the balance at 𝑃ℎ𝑝 1 075.83 a month for
𝑆 = 𝑅[ ]
𝑖 1 year. What is its cash price if the interest is 6% converted
monthly?
Where:
𝑆 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑎𝑛 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦
𝑅 = 𝑝𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑖 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑
𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
PERIODIC PAYMENT
We have two formulas for determining the periodic payment 𝑅. EXAMPLES:

𝑆𝑖 𝐴𝑖 7. A catering business obtains a loan from a bank. The loan is to

𝑅= 𝑛
𝑜𝑟 𝑅 = be repaid through monthly payments of 𝑃ℎ𝑝 49 973.31, the first of
(1 + 𝑖) − 1 1 − (1 + 𝑖)−𝑛
which is due at the end of 6 months and the last at the end of 5
The formula used depends on which between 𝑆 and 𝐴 is given. years. If the interest rate on the loan is 12% compounded
monthly, how much is the amount borrowed.
EXAMPLES:

5. An ordinary annuity payable quarterly at 13% compounded

every 3 months for 4 years and 9 months has a present value of
𝑃ℎ𝑝 75 000. How much is the quarterly payment?

8. Carlo borrowed 𝑃ℎ𝑝 450 000 with interest at 16% compounded

quarterly. He will repay this debt through 10 equal quarterly
payments, the first of which is due at the end of 2 years and 6
months. How much is the quarterly payment?
6. How much should be deposited in an account every 6 months to
have 𝑃ℎ𝑝 2 850 000 in 10 years? Money accumulates at 8%
compounded semi-annually.

DEFERRED ANNUITY
An annuity wherein the first payment does not coincide with the
first interest period. The length of time for which are no payments is
called the period of deferment. The first payment is made one period
after the period of deferment.

To compute for the present value 𝐴𝑑𝑒𝑓 of a deferred annuity, we

use the formula:
1 − (1 + 𝑖)−𝑛
𝐴𝑑𝑒𝑓 = 𝑅 [ ] (1 + 𝑖)−𝑑
𝑖

Where the 𝑑 is the number of payment periods for which no

payment is given. The amount of a deferred annuity is the same as the
amount of the 𝑛 payments. That is, 𝑆𝑑𝑒𝑓 = 𝑆.