Deferred

Annuities
GENERAL MATHEMATICS
Deferred Annuity – an annuity that does not begin until a given time
interval has passed. It is also defined as a financial product that
provides a stream of income at a later date.

Period of Deferral – time between the purchase of an annuity and the

start of the payments for the deferred annuity.
Time Diagram for a Deferred Annuity

R* R* … … R* R R … R

0 1 2 k k+1 k+2 … k+n

Artificial Payments Period of Deferral

Determining the Period of Deferral
Illustrative Example:
Monthly payments of P13,000 for 3 years that will start 8 months from now

P13,000 P13,000 … … P13,000 P13,000 P13,000 … P13,000

0 1 2 7 8 9 … 43

Artificial Payments Actual Payments

Period of Deferral = 7 periods

Determining the Period of Deferral
Illustrative Example:
Semi-annual payments of 13,000 for 13 years that will start 3 years from now

P13,000 P13,000 … … P13,000 P13,000 P13,000 … P13,000

0 1 2 5 6 7 … 31

Artificial Payments Actual Payments

Period of Deferral = 5 periods

Determining the Period of Deferral
Illustrative Example:
Payments of P13,000 every 3 months for 18 years that will start 4 years from
now
P13,000 P13,000 … … P13,000 P13,000 P13,000 … P13,000

0 1 2 15 16 17 … 87

Artificial Payments Actual Payments

Period of Deferral = 15 periods

Present Value of Deferred Annuity
The present value of a deferred annuity is given by:

𝟏 − (𝟏 + 𝒋)−(𝒌+𝒏) 𝟏 − (𝟏 + 𝒋)−𝒌
𝑷=𝑹 −𝑹
𝒋 𝒋
where
𝑅 → regular payment
𝑗 → interest rate per period
𝑛 → number of payments
𝑘 → number of conversion periods in the deferral (no. of artificial
payments)

*To identify 𝑗, 𝑛, and 𝑘, identify the number of times per year 𝑚 of payment interval
and interest period.
Illustrative Example:
On his 40th 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 he make on his 40th birthday to pay off this
pension plan, if the interest rate is 8% compounded quarterly?
Solution:
Step 1: 𝑅 = 𝑃10,000 𝑚=4 𝑗 = 8% ÷ 4 = 0.08 ÷ 4 = 0.02
𝑘 = 20 × 4 + 1 − 1 = 80 𝑛 = 5 × 4 = 20
1 − (1 + 𝑗)−(𝑘+𝑛) 1 − (1 + 𝑗)−𝑘
Step 2: 𝑃 = 𝑅 −𝑅
𝑗 𝑗
1 − (1 + 0.02)−(80+20) 1 − (1 + 0.02)−80
𝑃 = 10000 − 10000
0.02 0.02
𝑃 = 430983.51 − 397445.13
𝑃 = 33538.38
Step 3: Mr. Ramos should pay 𝑃33,538.38 to pay off his pension plan.
Illustrative Example:
A credit card company offers a deferred payment option for the purchase of any
appliance. Rose plans to buy a smart television set with monthly payments of P4,000
for 2 years. The payments will start at the end of 3 months. How much is the cash
price of the TV set if the interest rate is 10% compounded monthly?
Solution:
Step 1: 𝑅 = 𝑃4,000 𝑚 = 12 𝑗 = 10% ÷ 12 = 0.10 ÷ 12 = 0.008333
𝑘=2 𝑛 = 2 × 12 = 24
1 − (1 + 𝑗)−(𝑘+𝑛) 1 − (1 + 𝑗)−𝑘
Step 2: 𝑃 = 𝑅 −𝑅
𝑗 𝑗
1 − (1 + 0.008333)−(2+24) 1 − (1 + 0.008333)−2
𝑃 = 4000 − 4000
0.008333 0.008333
𝑃 = 93158.05 − 7901.10
𝑃 = 85256.95
Step 3: The cash price of the TV set is 𝑃85,256.95.
In 5 Minutes Only
A car is to be purchased in monthly payments of P19,500 for 5 years
starting at the end of 3 months. How much is the cash value of the car if
the interest rate used is 10% converted monthly?
Activity No. 4
A. Determine the period of deferral.
1. Monthly payments of P1,000 for 9 years that will start 9 months from now
2. Semi-annual payments of P12,700 for 5 years that will start 2 years from now
3. Withdrawals of P7,200 every 3 months for 9 years that will start at the end of 2
years
B. Solve the given problems.
1. A school service van is available for purchase at P23,000 monthly payable in 4
years. The first payment is due in 4 months. How much is the present value of
the van if the interest rate applied is 14% converted monthly?
2. A cash loan is to be repaid by paying P13,500 quarterly for 3 years starting at the
end of 4 years. If interest rate is 12% convertible quarterly, how much is the cash
loan?