NAME: ____________________________________ YR & SEC: _____________________

Competencies:
The learner calculates the fair market value of a cash flow stream that includes an annuity
(M11GM-IId-2); and calculates the present value and period of deferral of a deferred annuity
(M11GM-IId-3).
To The Learners:
Before starting the module, I want you to set aside other ​tasks that will disturb you while
enjoying the lessons. Read the simple instructions below to successfully enjoy the objectives of this
kit. ​Have fun!
1. Follow carefully all the contents and instructions indicated on every page of this module.
2. Write in your notebook the concepts about the lessons. ​Writing enhances learning ​that is
important to develop and keep in mind.
3. Perform all the provided activities in the module.
4. Let your facilitator/guardian assess your answers using the answer key card.
5. Analyze conceptually the post test and apply what you have learned.
6. Enjoy studying!

Expectations
This module was designed to help and give you an idea of the concepts about the application
of general annuity and deferred annuity.
After going through this module, you are expected to:
1. calculate the fair market value of a cash flow stream that includes an annuity; and
2. calculate the period of deferral and the present value of a deferred annuity.

Pre-test
Choose the letter of the correct answer. Write the chosen letter on a separate sheet of paper.
1. What do you call a single amount that is equivalent to the value of the payment stream at a
particular date?
A. Fair Market Value C. Maturity Value
B. Cash Value D. Down Payment
2. The company offers Php200 000 at the end of 5 years plus Php300 000 at the end of 8 years.
What is the fair market value of the money that is worth 6% compounded annually?
A. Php149 451.63 C. Php337 675.34
B. Php188 223.71 D. Php313 706.19
3. How many periods of deferral in monthly payments of Php10 000 for 8 years that will start 6
months from now?
A. 4 periods C. 89 periods
Page ​1​ of ​9
 B. 5 periods D. 96 periods
4. What is the period of deferral in semi-annual payments of Php15 000 for 10 years that will
start 5 years from now?
A. 4 periods C. 9 periods
B. 5 periods D. 10 periods
For item numbers 5 to 7: ​“A loan of Php15 000 is to be repaid monthly for 4 years that will start at
the end of 4 years with the interest rate of 6% compounded monthly”.
5. What type of annuity is this statement?
A. Simple Ordinary Annuity C. General Ordinary Annuity
B. Simple Annuity Due D. Deferred Annuity
6. What is the interest rate per period?
A. 0.005 C. 0.06
B. 0.01 D. 0.10
7. What is the period of deferral in the statement above?
A. 60 periods C. 48 periods
B. 50 periods D. 47 periods
For numbers 8 to 9: ​“A car is to be purchased in monthly payments of Php15 500 for 5 years starting
at the end of 4 months. How much is the cash value of the car if the interest rate used is 12%
compounded monthly?
8. Find the period of deferral.
A. 3 periods C. 40 periods
B. 4 periods D. 48 periods
9. What is the cash value of the car?
A. Php767 480.76 C. Php676 310.22
B. Php721 895.49 D. Php455 585.27
10. A loan is to be repaid quarterly for 5 years that will start at the end of 2 years. If the interest
rate is 6% compounded quarterly, what is the interest rate per period if the quarterly
payment is Php10 000?
A. 0.60 C. 0.015
B. 0.06 D. 0.005

Looking Back to Your Lesson

From your previous lesson, you have learned that the simple annuity is an annuity where the
payment interval is the same as the interest period while the general annuity is an annuity where
payment interval is not the same as the interest period.
The formula for the present value of a general annuity is given by
P =R ( 1−(1+j)−n
j )
where R​ is a regular payment;
j​ is the equivalent interest rate per payment interval converted
​from the interest rate per period; and
n​ is the number of payments.
Your knowledge about these things will be helpful in calculating the fair market value that
includes an annuity.

Page ​2​ of ​9
 Introduction of the Topic

Cash flow is a term that refers to payments received (cash inflows) or payments or deposits
made (cash outflows). Cash inflows can be represented by positive numbers and cash outflows can
be represented by negative numbers. The ​fair market value or ​economic value of cash flow
(payment stream) on a particular date refers to a ​single amount that is equivalent to the value of the
payment stream at that date. This particular date is called the ​focal date​.
Example:​
Bank XYZ offers Php200 000 at the end of 5 years plus Php800 000 at the end of 15 years.
Bank ABC offers Php15 000 at the end of each quarter for the next 10 years. Assume that the
money is worth 12% compounded semi-annually. Which bank offers a better market value?
Solution​:
Step 1​: Illustrate the cash flows of the two banks offer using the time diagram.

Step 2​: Choose the focal date.

Suppose that the selected focal date is the start of the term.
Step 3​: Determine the present value of each offer.
Since the focal date is the start of the term, compute for the present value of
each offer.
Bank XYZ Offer​:
The present value of Php200 000 five years from now is
−n 0.12 −(2)(5)
P 1 = F (1 + j ) = 200 000(1 + 2 )
−10
= 200 000(1.06) = P hp111 678.96

The present value of Php800 000 fifteen years from now is

−n 0.12 −(2)(15)
P 2 = F (1 + j ) = 800 000(1 + 2 )
−30
= 800 000(1.06) = P hp333 812.05

Fair Market Value (FMV) = ​P​1​ + ​P2​

= 11 678.96 + 333 812.05
Page ​3​ of ​9
 (FMV)= Php445 491.01
The fair market value of Bank XYZ is ​Php445 491.01

Bank ABC Offer:​

Compute for the present value of the general annuity with quarterly payments
but with semi-annually compounding at 12%.
Solve the equivalent rate, compounded quarterly, of 12% compounded
semi-annually.
F1​ ​ = F2​
4(10) 2(10)
(
P 1+ i(4)
4 ) (
=P 1+ i(2)
2 )
40
(1+ i(4)
4 ) = (1 + 0.12 20
2 )
1
i(4)
1+ 4 = (1.06) 2
1
i(4)
4 = (1.06) 2 − 1
i(4)
4 = 0.029563

The present value of an annuity is given by

P =R ( 1−(1+j)−n
j ) = 15 000 ( 1−(1+0.029563)−40
0.029563 ) = P hp349 184.00
The fair market value of Bank ABC is ​Php349 184.00​.
Therefore, ​Bank ABC​’s offers a better market value​ ​since its market value is larger.

A ​deferred annuity is an annuity in which the first payment is not made at the beginning
nor the end of the payment interval​, but a later date. The length of time between the purchase of an
annuity and the start of the payments is called the ​period of deferral​. Thus, an annuity that is
deferred for 4 periods will have the first payment at the end of 5 periods. Likewise, in an annuity
whose first payment is made at the end of the 5 periods, the annuity is deferred for 4 periods.

In this time diagram, the period of deferral is ​k because the regular payments of ​R start at
time ​k+1.​ The notation ​R* represents “artificial payments”, each equal to ​R,​ but are not paid during
the period of deferral.

Page ​4​ of ​9
 To determine the present value of a deferred annuity, find the present value of all ​k+n
payments (including the artificial payments), then subtract the present value of all artificial
payments.
Present Value of a Deferred Annuity
The present value of a deferred annuity is given by
P =R ( 1−(1+j)−(k+n)
j )−R( 1−(1+j)−k
j ) or P = R [ 1−(1+j)−(k+n)
j −
1−(1+j)−k
j ]
where
P​ = Present Value n​ = number of payments
R​ = Regular payment j​ = interest rate per period
k​ = number of periods in the deferral

A. Find the period of deferral in the deferred annuity.

1. Monthly payments of Php1 500 for 4 years which will start 10 months from now.
Solution:​ The first payment is at the time of 10 months. The period of deferral will be from
time 0 to time 9 months which is equivalent to ​9 periods​ or ​9 months.​

2. Annual payments of Php5 000 for 10 years will start 4 years from now.
Solution:​ The first payment is at the time of 4 years. The period of deferral will be from time 0
to time 3 years. Thus, the period of deferral is ​3 periods​ or ​3 years​.

3. Quarterly payments of Php10 000 for 4 years that may start 2 years from now.
Solution: Two years from now are at 8 quarters if one quarter is considered as one period.
Thus, the period of deferral is from time 0 to time 7 quarters which is corresponding to 7​
periods​ or ​7 quarters​.

4. Semi-annual payments of Php3 000 for 3 years that may start 3 years from now.
Solution:​ The first payment is due 3 years from now which is equivalent to time 6 if
payments are made semi-annually. The period of deferral is from time 0 to time 5, which is
similar to ​5 periods​ or ​5 semi-annual intervals​.

Page ​5​ of ​9
 B. Find the present value of the deferred annuity.
1. Find the present value of 8 semi-annual payments of Php2 000 each if the first payment is
due at the end of 4 years and money is worth 6% compounded semi-annually.
Solution:​
Step 1​: Find the period of deferral.

Step 2​: Determine the values

of ​R,​ ​j,​ ​n​ and ​k​ for the formula of the present value of a deferred annuity.
R​ = Php2 000 j = number ofannual rate 0.06
conversion per year = 2 = 0.03
n​ = 8 k​ = 7
Step 3​: Solve for the present value for the deferred annuity.
P =R [ 1−(1+j)−(k+n)
j −
1−(1+j)−k
j ]
[ ]
−(7+8)
1−(1+0.03) 1−(1+0.03)−7
P = 2 000 0.03 − 0.03

P = 2 000 [ ]
1−(1.03)−15 1−(1.03)−7
0.03 − 0.03

P​ = Php11 415.30
The present value of this problem is ​Php11 415.30​.
2. In a series of monthly payments of Php1 000 each, the first payment is due at the end of 2
years and the last payment at the end of 4 years. Find the present value of the deferred
annuity if money is worth 9% compounded monthly.
Solution:​
Step 1​: Find the period of deferral.

Step 2​: Determine the values of ​R​, ​j,​ n​ ​ and ​k​ for the formula of present value
of a deferred annuity.
R​ = Php1 000 j = number ofannual rate 0.09
conversion per year = 12 = 0.0075
n​ = 25 k​ = 23
Step 3​: Solve for the present value for the deferred annuity.
P =R [ 1−(1+j)−(k+n)
j −
1−(1+j)−k
j ]
P = 1 000 [ 1−(1+0.0075)−(23+25)
0.0075 −
1−(1+0.0075)−23
0.0075 ]
P = 1 000 [ ]
−48 −23
1−(1.0075) 1−(1.0075)
0.0075 − 0.0075
P​ = Php19 131.47
The present value of this problem is ​Php19 131.47​.
3. A house sells for Php1 000 000.00 down payment and 10 annual payments of Php120
000.00 each. If the first payment is deferred for 4 years, find the cash price if the money is
worth 10% compounded annually.

Page ​6​ of ​9
 Solution:​ The total cash price of the house is equal to downpayment plus the present value of
the deferred annuity.
Step 1​: Find the period of deferral.
Since the period of deferral is already stated which is equivalent of 4 periods or
4 years, then the value of ​k​ is 4.
Step 2:​ Determine the values of ​R​, ​j,​ n​ ​ and ​k​ for the formula of present value
of a deferred annuity.
R​ = Php120 000 j = number ofannual rate 0.10
conversion per year = 1 = 0.10
n​ = 10 k​ = 4
Step 3:​ Solve for the present value for the deferred annuity.
P =R [ 1−(1+j)−(k+n)
j −
1−(1+j)−k
j ]
P = 120 000 [ 1−(1+0.10)−(4+10)
0.10 −
1−(1+0.10)−4
0.10 ]
[ ]
−14 −4
1−(1.10) 1−(1.10)
P = 1 000 0.10 − 0.10

P​ = Php503 618.64
Total Cash Price = Downpayment + Present Value of Deferred Annuity
= Php1 000 000 + Php503 618.64
= Php1 503 618.64
The total cash price of the house is ​Php1 503 618.64​.

Activities:
Activity 1: B​ank​ D​istance​ O​rigin​ ​(Bank A)​ ​vs​ B​ank​ P​oint​ I​ntersection​ ​(Bank B)
Bank A offers Php350 000 at the end of 5 years plus Php800 000 at the end of 10 years.
Bank B offers Php50 000 at the end of semi-annual for the next 10 years. Assume that the money is
worth 6% compounded annually. Which offer has a better market value? ​B​ank D​istance O​rigin or
B​ank​ P​oint​ I​ntersection?
Activity 2: What is My Period?
Match Column A to Column B to find the period of deferral.
Column A Column B

Remember
1. Cash flow is a term that refers to payments received (cash inflows) or payments or deposits
made (cash outflows). Cash inflows can be represented by positive numbers and cash outflows
can be represented by negative numbers. The ​fair market value or ​economic value of cash flow
(payment stream) on a particular date refers to a ​single amount that is equivalent to the value of
the payment stream at that date. This particular date is called the ​focal date​.

Page ​7​ of ​9
2. A ​deferred annuity is an annuity in which the first payment is not made at the beginning nor
the end of the payment interval, but a later date. The length of time between the purchase of an
annuity and the start of the payments is called the ​period of deferral.
3. The following steps are suggested in solving the present value of a deferred annuity.
Step 1:​ ​ Find the period of deferral.
Step 2:​ ​ ​Determine the values of ​R​, ​j,​ n​ ,​ and ​k​ for the formula of present value
of a deferred annuity.
Step 3:​ ​ ​Solve for the present value for the deferred annuity.
P =R [ 1−(1+j)−(k+n)
j −
1−(1+j)−k
j ]
where P​ = Present Value n​ = number of payments
R​ = Regular payment j​ = interest rate per period
k​ =number of period in the deferral
Check Your Understanding
Read the following annuity problem. Fill in the blanks in the statements that follow.
Juan converted his loan to light payments which give him an option to pay Php2 000 every
month for 3 years. The first payment is due 6 months from now. How much is the amount of the
loan if the interest rate is 9% compounded monthly?
a. The type of annuity illustrated in the problem is a ___________.
b. The total number of payments is __________.
c. The number of conversion periods in the period of deferral is __________.
d. The interest rate per period is __________.
e. The present value of the loan is ___________.

Post-test
Choose the letter of the correct answer. Write the chosen letter on a separate sheet of paper.
1. What do you call a single amount that is equivalent to the value of the payment stream at a
particular date?
A. Fair Market Value C. Maturity Value
B. Cash Value D. Down Payment
2. The company offers Php200 000 at the end of 5 years plus Php300 000 at the end of 8 years.
What is the fair market value of the money is worth 6% compounded annually?
A. Php149 451.63 C. Php337 675.34
B. Php188 223.71 D. Php313 706.19
3. How many periods of deferral in monthly payments of Php10 000 for 8 years that will start 6
months from now?
A. 4 periods C. 89 periods
B. 5 periods D. 96 periods
4. Semi-annual payments of Php15 000 for 10 years that will start 5 years from now. What is
the period of deferral?
A. 4 periods C. 9 periods
B. 5 periods D. 10 periods
For item number 5 to 7: ​“A loan of Php15 000 is to be repaid monthly for 4 years that will start at the
end of 4 years with the interest rate of 6% compounded monthly”.
5. What type of annuity is this statement?

Page ​8​ of ​9
 A. Simple Ordinary Annuity C. General Ordinary Annuity
B. Simple Annuity Due D. Deferred Annuity
6. What is the interest rate per period?
A. 0.005 C. 0.06
B. 0.01 D. 0.10
7. How many periods of deferral?
A. 60 periods C. 48 periods
B. 50 periods D. 47 periods
For numbers 8 to 9: ​“A car is to be purchased in monthly payments of Php15 500 for 5 years starting
at the end of 4 months. How much is the cash value of the car if the interest rate used is 12%
compounded monthly?
8. What is the period of deferral?
A. 3 periods C. 40 periods
B. 4 periods D. 48 periods
9. What is the cash value of the car?
A. Php767 480.76 C. Php676 310.22
B. Php721 895.49 D. Php455 585.27
10. A loan is to be repaid quarterly for 5 years that will start at the end of 2 years. If the interest
rate is 6% compounded quarterly, what is the interest rate per period if the quarterly
payment is Php10 000?
A. 0.60 C. 0.015
B. 0.06 D. 0.005
Additional Activities
To better understand this module, watch the video lesson on
https://www.youtube.com/watch?v=vemqFYZI-6w​ entitled “Deferred Annuity”.

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