SECOND QUARTER

Chapter 7: Annuities
❖ Lesson 28: Simple Annuity
Lesson Topics:
1. Definition of terms
2. Time diagrams
3. Future value of a simple annuity
4. Present value of a simple annuity
5. Periodic payment of a simple annuity

PREREQUISITE SKILLS: Knowledge of Exponential and compound

interest
1
 SECOND QUARTER
Chapter 7: Annuities
➢ Lesson 28: Simple Annuity
Objective: At the end of this lesson, you should be
able to:
❑ able to illustrate simple and general
annuities,
❑ distinguish between simple and general
annuities, and
❑ find the future and present values of
simple annuities.
M11GM-IIc-1, c-2, c-d-1
 ❖ Performance Task No. 1 (2nd Quarter):
Time Frame: until January 2023
Note: Individual Activity (if you submitted similar report, the score will
be divided for the total number of similar report) to be submitted thru
an email; alfred_labadorjr@yahoo.com or in printed form.
Find situations involving simple and/or compound
interest in community. For example:
➢ Go to various banks (or their websites) and
determine the interest rates on their savings or time
deposit accounts.
➢ Find a cooperative in your community and ask about
its interest rates.
Based on your research, experiment with various
investments (e.g., P1, 000 or P5, 000 or some other
amount). How much will the investment be worth after 10
years? 20 years? 3
4
5
❑ (A) Learn about it! Definition of terms
➢ Annuity-a sequence of payment made at equal (fixed) intervals
or periods of time.

Annuities
According to Simple annuity General Annuity
payment An annuity where the An annuity where the
interval and payment interval is the same payment interval is not the
interest period as the interest period same as the interest period
Ordinary annuity (or Annuity Annuity Due
According Immediate) A type of annuity in which the
to time of A type of annuity in which the payments are made at
payment payments are made at the end beginning of each payment
of each payment interval interval.

Annuity Certain Contingent Annuity

According An annuity in which An annuity in which the
to duration payments begin and ends at payments extend over an
definite times indefinite (or indeterminate)
6
length of time
 A. Definition of terms
❑ Annuity-a sequence of
payments made at equal (fixed)
intervals or periods of time
❑ Payment interval - the time
between successive payments
❑ Term of an annuity - t – time
between the first payment
interval and last payment interval
7
 A. Definition of terms
❑ Regular or Periodic payment, R - the
amount of each payment
❑ Amount (Future value) of an annuity,
F – sum of future values of all the
payments to be made during the entire
term of the annuity.
❑ Present value of an annuity, P – sum
of present values of all the payments to be
made during the entire term of the
annuity. 8
➢ (B) Provides real Life examples of annuity certain and contingent annuity.

❑ Example of annuity certain: installment basis of

paying a car, appliance, house and lot, tuition
fee, etc.
❑ Examples of contingent annuity: life insurance,
pension payments
➢ (C) Illustrate simple annuities.

P Simple Annuity F
R R R R R . . . R
0 1 2 3 4 9
5 . . . n
➢ (D) Illustrate certain examples of annuities using time diagrams.

An installment payment of an appliance of ₱3,000 every

month for 6 months
P F
3,000 3,000 3,000 3,000 3,000 3,000
0 1 2 3 4 5 6

Periodic payment R = 3,000

Term t = 6 months
Payment interval = 1 month 10
➢ (E) Illustrate and distinguish between simple and general
annuities by providing examples.
Both simple & general annuities have a time diagram for its cash
flow as shown below. The main difference is that a simple annuity
the payment interval is the same as the interest period while in a
general annuity the payment interval is not the same as the
interest period.
F
P
R R R R R ... R
0 1 2 3 4 5 ... n
➢ Example of a simple annuity - Instalment payment for an
appliance at the end of each month with interest compounded
monthly.
➢ Example of a general annuity - Instalment payment for an
appliance at the end of each month
11
with interest compounded
annually.
➢ (F) Illustrative example on how to compute for the amount
(future value) of a simple annuity immediate.

Example 1. Suppose Mrs. Remoto

would like to save ₱3,000 at the
end of each month, for six
months, in a fund that gives 9%
compounded monthly. How
much is the amount or future
value of her savings after 6
months? 12
Example 1. Suppose Mrs. Remoto would like to
save ₱3,000 at the end of each month, for six
months, in a fund that gives 9% compounded
monthly. How much is the amount or future value
of her savings after 6 months?
Given: R = ₱3,000
term = 6 months
interest rate per annum 𝒊 (𝟏𝟐) = 0.09
number of conversion per year m = 12
𝟎.𝟎𝟗
interest rate per period j = 𝟏𝟐 = 0.0075

Find: amount (future value) at the end of

the term, F 13
Solution.
(1) Illustrate 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
(2) Find the future value of all the payments at the end of the term
(t = 6)
3,000 3,000 3,000 3,000 3,000 3,000
0 1 2 3 4 5 6
3,000
3,000 (1+0.0075)
3,000 (1+0.0075)²
3,000 (1+0.0075)³
3,000 (1+0.0075)⁴
3,000 (1+0.0075)⁵
14
(2) Add all the future values obtained from previous
step.
3,000 = 3,000
3,000 (1+0.0075) = 3,022.500
3,000 (1+0.0075)² = 3,045.169
3,000 (1+0.0075)³ = 3,068.008
3,000 (1+0.0075)⁴ = 3,091.018
3,000 (1+0.0075)⁵ = 3,114.200

F = 18,340.89

Thus, the amount of this annuity is ₱18,340.89

15
➢ (G) Derivation of the formula in finding the amount of an
ordinary annuity.

F
R R .... ... R R
0 1 2 . . . . . . . n-1 n

R
R(1+j)
.
.
.
𝑹(𝟏 + 𝒋) 𝒏−𝟐
𝑹(𝟏 + 𝒋) 𝒏−𝟏

𝑭 = 𝑹 + 𝑹 𝟏 + 𝒋 + 𝑹(𝟏 + 𝒋) 𝟐 + . . .+ 𝑹(𝟏 + 𝒋) 𝒏−𝟐 +𝑹(𝟏 + 𝒋) 𝒏−𝟏 EQ. 1

16
 𝑭 = 𝑹 + 𝑹 𝟏 + 𝒋 + 𝑹(𝟏 + 𝒋) 𝟐 + . . .+ 𝑹(𝟏 + 𝒋) 𝒏−𝟐 +𝑹(𝟏 + 𝒋) 𝒏−𝟏 Eq.(𝟕. 𝟏)

Multiply both sides by 1+j to get

𝑭(𝟏 + 𝒋) = 𝑹(𝟏 + 𝒋) + 𝑹 𝟏 + 𝑱 + 𝑹(𝟏 + 𝒋) 𝟐 + 𝑹(𝟏 + 𝒋) 𝟑 . . .+ 𝑹(𝟏 + 𝒋) 𝒏−𝟏+𝑹(𝟏 + 𝒋) 𝒏

Eq.(𝟕. 𝟐)
From Eq.(7.2), subtract Eq.(7.1) to produce
𝑭(𝟏 + 𝒋) = 𝑹(𝟏 + 𝒋) + 𝑹 𝟏 + 𝑱 + 𝑹(𝟏 + 𝒋) 𝟐 + 𝑹(𝟏 + 𝒋) 𝟑 . . .+ 𝑹(𝟏 + 𝒋) 𝒏−𝟏+𝑹(𝟏 + 𝒋) 𝒏

−[𝑭 = 𝑹 + 𝑹 𝟏 + 𝒋 + 𝑹(𝟏 + 𝒋) 𝟐 + . . .+ 𝑹(𝟏 + 𝒋) 𝒏−𝟐 +𝑹(𝟏 + 𝒋) 𝒏−𝟏 ]

𝒏
𝑭 𝟏+𝒋 −𝑭 = 𝑹 𝟏+𝒋 − 𝐑 simplify the left side of the eq.
𝒏
𝑭[ 𝟏 + 𝒋 − 𝟏] = 𝑹[ 𝟏 + 𝒋 − 𝟏] simplify the left side of the eq.
𝒏
𝑭(𝒋) = 𝑹[ 𝟏 + 𝒋 − 𝟏] divide both side by j
𝟏+𝒋 𝒏 −𝟏
F =R 𝒋
𝟏+𝐉 𝐧 −𝟏
T𝐡𝐞 𝐞𝐱𝐩𝐫𝐞𝐬𝐬𝐢𝐨𝐧 is usually denoted by the symbol Sn (this is read as ‘S angle n’ )
𝐣
17
Amount (Future Value) of an Ordinary Annuity (Annuity Immediate)
R R R R R ... R
0 1 2 3 4 5 ... n
T𝐡𝐞 𝐚𝐦𝐨𝐮𝐧𝐭 𝐠𝐢𝐯𝐞𝐧 𝐨𝐟 𝐚𝐧 𝐚𝐧𝐧𝐮𝐢𝐭𝐲 𝐢𝐦𝐦𝐞𝐝𝐢𝐚𝐭𝐞 𝐢𝐬 𝐠𝐢𝐯𝐞𝐧 𝐛𝐲

𝟏+𝐣 𝐧 −𝟏
F =Rn = R
𝐣
Where R is the regular payment
j is the interest rate per period
n is the number of payments
(h) Using Example 1, solve for F using the
derived formula
𝟏+𝐣 𝐧 −𝟏
F =R
Given: R = ₱3,000 𝐣
term = 6 months
interest rate per annum 𝒊 (𝟏𝟐) = 0.09
number of conversion per year m = 12
𝟎.𝟎𝟗
interest rate per period j = 𝟏𝟐 = 0.0075

𝟏+𝟎.𝟎𝟎𝟕𝟓 𝟔 −𝟏
F = 3,000
𝟎.𝟎𝟎𝟕𝟓
F=18,340.89 19
Example 2. In order to save for
high school graduation,
Marie decided to save ₱200
at the end of each month. If
the bank pays 0.250%
compounded monthly, how
much will her money be at
the end of 6 years?
20
Example 2.In order to save for high school graduation,
Marie decided to save ₱200 at the end of each month. If
the bank pays 0.250% compounded monthly, how much
will her money be at the end of 6 years?
Given: R = ₱200
term t in years = 6
interest rate per annum 𝒊 (𝟏𝟐) = 0.0025
number of conversion per year m = 12
𝟎.𝟎𝟎𝟐𝟓
interest rate per period j = = 0.0002083
𝟏𝟐
n=mt = (12)(6) = 72 periods

Find: amount (future value) at the end of the

term, F 21
Find: amount (future value) at the end of the term, F
Given: R = ₱200 t = 6 𝒊 (𝟏𝟐) = 0.0025 m = 12
𝟎.𝟎𝟎𝟐𝟓
j = 𝟏𝟐 = 0.0002083 n= 72 periods

Solution. F = R 𝟏+𝐣 𝐧 −𝟏
𝐣
𝟏+𝟎.𝟎𝟎𝟎𝟐𝟎𝟖𝟑 𝟕𝟐 −𝟏
F = 200
𝟎.𝟎𝟎𝟎𝟐𝟎𝟖𝟑

F = 14,507.02
22
➢ (I) Example on how to compute for the present value of an
ordinary annuity (annuity immediate)

Example 3. (Recall the problem in

Example 1) Suppose Mrs. Remoto
would like to know the present
value of her monthly deposit of
₱3,000 when interest is 9%
compounded monthly. How much is
the present value of her savings at
the end of 6 months? 23
Example 3. (Recall the problem in Example 1) Suppose
Mrs. Remoto would like to know the present value of
her monthly deposit of ₱3,000 when interest is 9%
compounded monthly. How much is the present value of
her savings at the end of 6 months?

Given: periodic payment R = ₱3,000

term t = 6 months
interest rate per annum 𝒊 (𝟏𝟐) = 0.09
number of conversion per year m = 12
𝟎.𝟎𝟗
interest rate per period j = = 0.0075
𝟏𝟐

Find: Present Value P 24

(1). Discount the payment of each period to the beginning of the
term-that is, find the present value of each payment. Recall the
formula 𝐅 𝟑,𝟎𝟎𝟎 )− 𝐭
P= 𝐦𝐭 = = 3,000 (𝟏. 𝟎𝟎𝟕𝟓
𝐢 (𝐦) 𝟏.𝟎𝟎𝟕𝟓 𝐭
𝐣 𝟏+
𝐦

3,000 3,000 3,000 3,000 3,000 3,000

0 1 2 3 4 5 6
3,000 (1.0075) ⁻¹
3,000 (1.0075) ⁻²
3,000 (1.0075) ⁻³
3,000 (1.0075) ⁻⁴
3,000 (1.0075) ⁻⁵
3,000 (1.0075) ⁻⁶
25
(2). Add the discounted payments to get the present
value.
3,000 (1.0075) ⁻¹ = 2,977.667
3,000 (1.0075) ⁻² = 2,955.501
3,000 (1.0075) ⁻³ = 2,933.50
3,000 (1.0075) ⁻⁴ = 2,911.663
3,000 (1.0075) ⁻⁵ = 2,889.988
3,000 (1.0075) ⁻⁶ = 2,868.474
P = 17,536.79
Thus, the cost of the TV set at the beginning of
the terms is ₱17,536.79 26
(2). Add the discounted payments to get the present value.
Thus, the cost of the TV set at the beginning of
the terms is ₱17,536.79
Alternate solution to Example 3:
Since we already know from Example 1 that the
accumulated amount at the end of 6 months is
₱18,340.89, then we can simply get the present
value of this amount using the formula
𝐅 𝐅
P= 𝐧 = 𝐢 (𝐦)
𝟏+𝐣 (𝟏+ ) 𝐦𝐭
𝐦
𝟏𝟖,𝟑𝟒𝟎.𝟖𝟗
P= 𝟎.𝟎𝟗 𝟔 = 17,536.79
(𝟏+ 𝟏𝟐 ) 27
(j) The derivation of the formula in finding the present value P of an annuity
immediate is similar to the solution of example 3.
Discount or get the value of each payment at the beginning of the term and
then add to get the present value of an ordinary annuity. Use the formula…

𝐅 −𝐧
P= =F 𝟏+𝐣
𝟏+𝐉 𝐧

R R ... R R
0 1 2 ... n -1 n
−𝟏
R 𝟏+𝒋
−𝟐
R 𝟏+𝒋
.
.
.
−(𝒏−𝟏)
R 𝟏+𝒋
−𝒏
R 𝟏+𝒋 28
The present and future values of an annuity is
also related by

F=P 𝟏+𝐣 𝐧
𝐅
P= 𝐧
𝟏+𝐣 29
 −𝟏 −𝟐 −(𝐧−𝟏) −𝐧
P=R 𝟏+𝐣 +R 𝟏+𝐣 +⋯R 𝟏+𝐣 +R 𝟏+𝐣
𝐑 𝐑 𝐑 𝐑 𝐑 Eq.(𝟕. 𝟑)
P= 𝟏+𝐣 𝟏
+ 𝟏+𝐣 𝟐
+ 𝟏+𝐣 𝟑
+ ⋯+ 𝟏+𝐣 𝐧−𝟏
+ 𝟏+𝐣 𝐧
𝟏
Multiply both sides by to get
𝟏+𝐣
𝐏 𝐑 𝐑 𝐑 𝐑
= 𝟐 + 𝟑 + ⋯+ + Eq.(𝟕. 𝟒)
𝟏+𝐣 𝟏+𝐣 𝟏+𝐣 𝟏+𝐣 𝐧 𝟏+𝐣 𝐧+𝟏
From Equation (7.3), subtract Equation (7.4) to produce
𝟏 𝐑 𝐑
P- P 𝟏+𝐣 = (𝟏+𝐣) − 𝟏+𝐣 𝐧
𝟏 𝐑 𝟏
P(1- )= 𝟏+𝐣 (1− 𝟏+𝐣 𝐧)
𝟏+𝐣
𝟏+𝐣−𝟏 𝐑 −𝐧 )
P( )= (1- 𝟏+𝐣
𝟏+𝐣 𝟏+𝐣
𝐣 𝐑 −𝐧 )
P(𝟏+𝐣 )= 𝟏+𝐣 (1- 𝟏 + 𝐣
−𝐧) )
Pj= R(1- 𝟏 + 𝐣
1− 𝟏+𝐣 −𝐧
P= R 𝐣 30
 1− 𝟏+𝐣 −𝐧
The expression is usually denoted by
𝐣
the symbol ( this is read as ‘a angle n’). Hence,
the present value P of an ordinary annuity can be
written as
1− 𝟏+𝐣 −𝐧
P = Raṉ ¬ = R
𝐣
Alternate Derivation
The future value of an ordinary annuity was
given earlier by
𝟏+𝐣 −𝐧 −𝟏
F=R
𝐣 31
To get the present value of this amount, we use
the formula 𝐅 𝟏+𝐣 −𝐧 −𝟏
P= 𝐧 F=R
𝟏+𝐣 𝐣
and obtain

𝐅 𝟏+𝐣 −𝐧 −𝟏 −𝐧
P= P=R
𝐣
𝟏+𝐣
𝟏+𝐣 𝐧
𝟏+𝐣 −𝐧 −𝟏
R 𝟏− 𝟏+𝐣 −𝐧
P=
𝐣
P=R
𝟏+𝐉 𝐧 𝐣
32
Present Value of an Ordinary Annuity (Annuity Immediate)
R R R R R ... R
0 1 2 3 4 5 ... n
The present value of an annuity-immediate is given by
𝟏− 𝟏+𝐣 −𝐧
P=R
𝐣

Where R is the regular payment

j is the interest rate per period
n is the number of payments
(h) Using Example 3, solve for P using the derived formula

𝟏− 𝟏+𝐣 −𝐧 𝟏− 𝟏+𝟎.𝟎𝟎𝟕𝟓 −𝟔
P=R P =3,000
𝐣 𝟎.𝟎𝟎𝟕𝟓

P =17,536.79
33
Definition

The cash value or cash

price is equal to the down
payment (if there is any)
plus the present value of
the installment
payments. 34
Example 4. Mr. Ribaya paid
₱200,000 as down payment for a
car. The remaining amount is to
be settled by paying ₱16,200 at
the end of each month for 5
years. If the interest is 10.5%
compounded monthly, what is
the cash price of his car?
35
Example 4. Mr. Ribaya paid ₱200,000 as down payment for
a car. The remaining amount is to be settled by paying
₱16,200 at the end of each month for 5 years. If the
interest is 10.5% compounded monthly, what is the cash
price of his car?
Given: down payment = ₱200,000
term t = 5 years
interest rate per annum 𝒊 (𝟏𝟐) = 0.105
number of conversion per year m = 12
𝟎.𝟏𝟎𝟓
interest rate per period j = = 0.00875
𝟏𝟐
n = mt = 12(5) = 60 periods

Find: cash value or cash price of the car 36

P=? The time diagram for the installment payments is given by:

16,200 16,200 16,200 ... 16,200

0 1 2 3 ... 60
The present value of this ordinary annuity is given by
𝟏− 𝟏+𝐣 −𝐧
P=R 𝐣

𝟏− 𝟏+𝟎.𝟎𝟎𝟖𝟕𝟓 −𝟔𝟎
P =16,200
𝟎.𝟎𝟎𝟖𝟕𝟓

P = 753,702.20
37
Find: cash value or cash price of the car
Given: P = ₱ 753,702.20 DP = ₱200,000
Cash Value = Down Payment + Present Value
= 200,000 + 753,702.20
= ₱953,702.20
The cash price of the car is
₱953,702.20.
38
Example 5. Paolo borrowed
₱100,000. 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 is 8%
compounded annually? 39
Example 5. Paolo borrowed ₱100,000. 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 is 8% compounded annually?

Given: Principal= ₱100,000

term t = 3 years
interest rate per annum 𝒊 (𝟏) = 0.08
number of conversion per year m = 1
interest rate per period j = 0.08
n = mt = 1(3) = 3 periods

Find: periodic payment R 40

Solution. The cash flow of this annuity is
illustrated in the time diagram given below.
P = 100,000 R = ? R=? R=?
0 1 2 3
𝟏− 𝟏+𝐣 − 𝐧
Since P=R then
𝐣
𝐏
R = 𝟏− 𝟏+𝐣 − 𝐧 R =38, 803.35
𝐣
𝟏𝟎𝟎,𝟎𝟎𝟎 Thus, the man should pay
R = 𝟏− 𝟏+𝟎.𝟎𝟖 −𝟑
₱38,803.35 for every year
𝟎.𝟎𝟖
for 3 years
41
➢ IMPORTANT FORMULAS TO BE USED
Future Value (F) of an Ordinary Annuity:
𝟏+𝐣 𝐧 −𝟏
F= Rsṉ¬ = R
𝐣
Present Value (P) of an Ordinary Annuity:
𝟏− 𝟏+𝐣 −𝐧
P= Raṉ¬ = R
𝐣
✓ Remember that an ordinary annuity is an
annuity where payments are made at the
end of each period. 42
 ❖ Seat work: Simple Annuity
Time Frame: 8 minutes
Note: Use Yellow paper in submitting seatwork.

Seatwork 1. Find the present value P and amount F of the

following ordinary annuities.
(a) Quarterly payments of ₱2,000 for 5 years with interest rate of
8% compounded quarterly. Answer, F=48,594.74, P=32,702.87
(b) Semi-annual payments of ₱8,000 for 12 years with interest
rate of 12% compounded semi-annually. Answer, F=406,524.60
P=100,402.90
(c) Daily payments of ₱50 for 30 days with interest rate of 20%
compounded daily. Answer, F=1,511.98, P=1,487.33
𝟎.𝟐
Note: The interest per conversion period is , and there are 30
𝟑𝟔𝟓
(not 30 x 365) conversion periods.
43
 ❖ Seat work: Simple Annuity 44
Time Frame: 10 minutes
Seatwork 2. Answer the following problems.
(a) Peter started to deposit ₱5,000 quarterly in a fund that pays 1%
compounded quarterly. How much will be in the fund after 6 years?
(b) The buyer of a lot pays ₱50,000 cash and ₱10,000 every month
for 10 years. If money is 8% compounded monthly, how much is the
cash value of the lot?

(c) How much should be invested in a fund each year paying 2%

compounded annually to accumulate ₱100,000 in 5 years?
(d) A ₱50,000 loan is payable in 3 years. To pay the loan, the debtor must pay
an amount every 6 months with an interest rate of 6% compounded semi-
annually. How much should he pay every 6 months?

(e) An appliance is for sale at either (a) ₱15,999 cash or (b) on terms, ₱1,499
each month for the next 12 months. Money is 9% compounded monthly. Which
is lower, the cash price or the present value of the instalment terms? Explain.
 ❖ Evaluation: Simple Annuities
Time Frame: 20 minutes
Note: Use Yellow paper in submitting evaluation work.

Evaluation 1. Fill in the blanks.

(a) A sequence of payments made at equal time period is a/an________.

(b) A simple annuity in which the payments are made at the end of each
period is a/an________.

(c) An annuity where the payment interval is not the same as the interest
period is a/an_________.

(d) An annuity where the payment interval is the same as the interest
period is a/an________.

(e) An annuity in which payments begin and end at definite times is

a/an________.

45
 ❖ Group Report / Presentation
Time Frame: at least 15 minutes,
Presentation style: audio/video, PowerPoint
Group 1: Lesson 31 – Stock and Bonds, reference: page 222, Gen.
Math Learning Module

Group 2: Lesson 32 - Market Indices for Stocks and Bonds,

reference: page 230, Gen. Math Learning Module

Group 3: Lesson 33 – Theory of Efficient Markets, reference: page

233, Gen. Math Learning Module

Group 4: Lesson 34 – Business Loans and Consumer Loans,

reference: page 237, Gen. Math Learning Module

Group 5: Lesson 35 – Solving Problems on Business and Consumer

Loans, reference: page 240, Gen. Math Learning Module
46
 Problems that
involve expenses and cash a
re present value problems.
Problems that
involve income or revenue a
re future value problems.
47
❑ Simple annuity is an annuity in
which the payment interval is
equal to the compounding period.
❑ Present value is the amount of
money required in the beginning.
❑ Future value is the sum of the
accumulated values of the
periodic payments at the end of
the term. 48
❑ If the payment is made at the
end of each payment interval,
it is an ordinary annuity.
❑ If the payment is made at the
beginning of each payment
interval, it is an annuity due.
49