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Lesson 3:

SIMPLE
ANNUITY
✓ Define annuity payment ✓

Identify two types of annuity

✓ Find the future value and


present value of simple
annuities
SIMPLE ANNUITY

ANNUITY
CERTAIN GENERAL
ANNUITY

ANNUITY
ANNUITY
UNCERTAIN
ORDINARY
ANNUITY ORDINARY ANNUITY ANNUITY DUE
DEFERRED
GENERAL PERPETUITIES
ANNUITY DUE
ANNUITY GENERAL

Annuity
✓An annuity is an agreement of simply a contract
which states that a person will pay another person
a sequence of equal payments at periodic intervals
for a specified time.
✓A fixed sum of money paid to someone at regular
intervals, subject to a fixed compound interest
rate.

Interval

The time gap from one payment


to another. The interval may be
annually, semi – annually,
quarterly or monthly.
Term of Annuity
The time from the start of the
payment until the end
Annuity Certain
✓Payable for a definite duration.
Begins and ends on a definite or
fixed date
✓Example:
Monthly payment of car loan
Annuity Uncertain
✓annuity payable for an indefinite
duration (Example: Insurance);
dependent on some certain
event.
Simple Annuity
For example:
Mr. Villamor enrolls his daughter Marianne in the
College Educational Plan (CEP). He pays Php 2,100
at the end of each three months. In turn, the CEP
deposits the payments in a bank which pays at
12% compounded quarterly.

Simple Annuity
✓interest conversion or
compounding period is EQUAL
or the SAME as the payment
interval.
General
Annuity For example:
Mr. Villamor enrolls his daughter Marianne in the
College Educational Plan (CEP). He pays Php 2,100
at the end of each three months. In turn, the CEP
deposits the payments in a bank which pays at
12% compounded monthly.

General Annuity

✓interest conversion or
compounding period is
UNEQUAL or NOT the same as
the payment interval.
1. Ordinary Annuity (����)
- annuity in which the periodic payment is made at the
end of each payment interval.

2. Annuity Due
- an annuity in which the periodic payment is made at
the beginning of each payment interval.

3. Deferred Annuity
- the periodic payment is not made at the beginning nor
at the end of each payment interval, but some later
date.
1. General Ordinary Annuity -
first payment is made at the end of every
payment interval.

2. General Annuity Due


- first payment is made at the beginning of
every payment interval.

3. Perpetuities
- a series of periodic payments which are to run
infinitely or forever.
Example 1: Determine if the given situations
represent simple annuity or general annuity.

1. Payments are made at the end of each month for a


loan that charges 5% interest compounded
monthly.
SIMPLE ANNUITY
2. A deposit of ₱10,000 was made at the end of three
months to an account that earns 2% interest
compounded semi – annually.
GENERAL ANNUITY
Example 2: Determine whether the situation
describes an ordinary annuity or an annuity
due. Justify your answer.

1. Jack’s monthly mortgage payment is ₱25,125.05 at


the end of each month.
Ordinary annuity
2. The rent for the apartment is ₱6,000 and due at the
beginning of each month.
Annuity due
ANNUITY ANNUITY
UNCERTAIN

ANNUITY
SIMPLE ANNUITY
CERTAIN
GENERAL ORDINARY GENERAL
ANNUITY
ANNUITY ANNUITY DUE

ANNUITY DUE PERPETUITIES

DEFERRED

ANNUITY GENERAL

ORDINARY ANNUITY
SIMPLE ORDINARY ANNUITY
FUTURE VALUE (FV)
��
���� = �� ∙(�� + ��) −��
��
Where FV = Future Value
P = Periodic Payment
i = interest rate per period, where

�� =��(������������ ��������)
��(����������������������
������������)
n = total no. of conversions periods in a year
�� = ����
Example 1: If you pay ₱55 at the end of each month for 30
years on account that pays interest at 25% compounded
monthly, how much money do you have after 30years?
�� + ����
���� = �� ∙
− �� ��
P = 55 t = 30
���� m = 12
0.25
�� = ������
− �� = ���� ∙
��. ����
�� +��. ���� 12 ����
n = 12(30) = 360 ������. ����

= ₱��, ������,
SIMPLE ORDINARY ANNUITY
PRESENT VALUE (PV)
−��
���� =��[�� − (�� + ��) ]
��
Where PV = Present Value
P = Periodic Payment
i = interest rate per period, where
�� =��(������������ ��������)
��(����������������������
������������)
n = total no. of conversions periods in a year
�� = ����
Example 2: Jose borrows money to buy a motorcycle. He
will repay the loan by making monthly payment of ₱2,000
at the end of 2 years with an interest rate of 9% per year
compounded monthly. How much did Jose borrow?
��[�� −
���� =
P = 2,000 t = 2
(�� + ��)−��
] ��
����
0.09 = 24 ������
�� =
12 =
�� − ��
= ₱����,
m = 12 +��. ���� ������
n = 12(2) ��, ���� . ����
��. ���� −����
SIMPLE ANNUITY

ANNUITY
CERTAIN GENERAL
ANNUITY

ANNUITY
ANNUITY
UNCERTAIN
ORDINARY
ANNUITY ORDINARY ANNUITY ANNUITY DUE
DEFERRED
GENERAL PERPETUITIES
ANNUITY DUE
ANNUITY GENERAL

SIMPLE ANNUITY DUE


FUTURE VALUE (FV)
��
���� = �� ∙�� + �� − ��
∙ (�� + ��)
��
Where FV = Future Value
P = Periodic Payment
i = interest rate per period, where

�� =��(������������ ��������)
��(����������������������
������������)
n = total no. of conversions periods in a
year �� = ����
Example 1: ₱2,000 deposited at the beginning of each quarter
for 3 years at 12% compounded quarterly. Calculate the amount
of annuity.
t=3
P = 2,000 0.12
�� =
���� ���� − ��
4���� 0.03
m=4
n = 3(4) = 12
��. ���� ∙ �� + ��. ����
���� = �� ∙�� +
��
�� − �� = ₱����,
������. ����
��∙ (�� + ��)
= ��, ������ ∙�� + ��.
SIMPLE ANNUITY DUE
PRESENT VALUE (PV)
−��
���� =��[�� − (�� + ��) ]
∙ (�� + ��)
��
Where PV = Value
P = Periodic Payment
i = interest rate per period, where

�� =��(������������ ��������)
��(����������������������
������������)
n = total no. of conversions periods in a
year �� = ����
Example 2: Liza borrows money for the renovation of her
house and repays by making yearly payments of ₱60,000 at
the beginning of each year for a period of 10 years at an interest
rate of 8% compounded annually. How much did Liza borrow?
n = 1(10) = 10
P = 60,000 ��[�� − (��
t = 10 ���� =
�� = 0.08 + ��)−��
]
1= 0.08
m=1
������. ����
��∙ (�� + ��)
����, ������ �� − �� +
=
��. ���� −����

��. ���� ∙ (�� + ��. ����)

= ₱������,

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