Deferred Annuity

Objective:

▪ Calculate the present value and

period of deferral of a deferred
annuity.
Definitions:

▪ Deferred annuity is an annuity in

which the first payment interval is
not made at the beginning nor end of
the payment interval, but at a later
date.
▪ Deferral period is the length of time
from the present to the beginning of the
first payment interval.

▪ Present value is the amount of money

to be invested or to be paid today.
Formula:
−𝒅 −(𝒏+𝒅)
(𝟏 + 𝒋) −(𝟏 + 𝒋)
𝑷=𝑹
𝒋
where:
P = the present value of a deferred annuity
R = periodic payments of deferred annuity
t = term
m = compounding period
n = length of the term or number of
payment (t x m)
im = interest rate
j = interest rate per conversion period
m
(i /m)
p = number of deferred periods
d = number of paying periods (m x p)
On his th
40 birthday, Mr. Ramos decided to
buy a pension plan for himself. This plan
will allow him to claim P10,000 quarterly
for 5 years starting 3 months after his 60th
birthday. What one-time payment should
th
he make on his 40 birthday to pay off
this pension plan, if the interest rate is 8%
compounded quarterly.
What is asked?
Present value
What are the given?

P10000
R = ___________________ 8% or 0.08
i = ___________________
5 years
t = ___________________ 0.08/4 = 0.02
j = ________________________
4
m = ___________________ p =________________________
20
20
n = ___________________ m x p = 4 x 20 = 80
d = ________________________
What formula is to be used?
−𝒅 −(𝒏+𝒅)
(𝟏 + 𝒋) −(𝟏 + 𝒋)
𝑷=𝑹
𝒋
Substitute the given values to the formula then solve.
−𝟖𝟎 −(𝟖𝟎+𝟐𝟎)
(𝟏 + 𝟎. 𝟎𝟐) −(𝟏 + 𝟎. 𝟎𝟐)
𝑷 = 𝟏𝟎𝟎𝟎𝟎
𝟎. 𝟎𝟐
P = P33,538.38
Therefore, Mr. Ramos should make a one-time
payment of P33,538.38.
Find the present value of an annual
payment of P700 which is worth 5%
compounded annually. The first payment is
made at the end of 7 years and the last
payment is made at the end of 15 years.
 What is asked?
Present value
What are the given?

P700
R = ___________________ 5% = 0.05
i = ___________________
9 years
t = ___________________ i/m = 0.05
j = ________________________
1
m = ___________________ 6
p =________________________
9
n = ___________________ 6 x 1= 6
d = ________________________
What formula is to be used?
(𝟏 + 𝒋)−𝒅 −(𝟏 + 𝒋)−(𝒏+𝒅)
𝑷=𝑹
𝒋
Substitute the given values to the formula then solve.
(𝟏 + 𝟎. 𝟎𝟓)−𝟔 −(𝟏 + 𝟎. 𝟎𝟓)−(𝟗+𝟔)
𝑷 = 𝟕𝟎𝟎
𝟎. 𝟎𝟓
P = P3,712.78
Therefore, the present value is P3,712.78.