Annuity

Annuity
- A sequence of periodic equal
payment at a regular interval.
Examples of annuity:
 Installment payments like credit
card, monthly rentals, housing
amortization, and insurance
premium.
Types of Annuity based on Terms
1. Annuity Certain
- Annuity in definite duration. It has
beginning and end on the definite date.
Payment made in the beginning is
followed with the succeeding payments
on a fixed date until fully settled.
- Example in housing loan, bank requires
payment at the start of annuity and the
remaining payment submitted in the
fixed date.
Payment interval
- It is the periodic time between
payments. The period (m) is the
same with the terms or mode of
payments (or depending on other
agreements) of compound interest,
where monthly (12), quarterly (4),
semiannually (2) and annually (1).
2. Annuity Uncertain
- Annuity is indefinite duration.
The annuity payment depends
on certain events or situations.
- Examples are health or life insurance
and pension (when the insured
person dies the annuity is ceased.)
3. Perpetuity
- Annuity that has a
beginning and continues
indefinitely.

- Examples are scholarship from

endowment and irredeemable
investments.
 Types of Annuity based on
Compounding Period
1. Simple Annuity
- The number of compounding period (m)
per year is equal to the number of annuity
per year.
2. General Annuity
- The number of compounding periods per
year is not equal to the number of annuity
per year.
 Types of Annuity based on
Payment Schedule
1. Ordinary Annuity
- Annuity that is received at the end of the
period.
2. Annuity Due
- Annuity that is received at the beginning
of the period.
3. Deferred Annuity
- Annuity that the first payment is made
after a certain period or interval.
 Terms and Notation
1. Payment Interval
- It is the duration of time between
payments in an annuity.
2. Terms of Annuity
- It is the duration of time between
payments from the beginning and at the
end of the term.
3. Future Value of an annuity
- It is the sum of all periodic payment at the
end of the term.
4. Present Value of an Annuity
- It is the sum of requirred payment at the start
of the annuity.
5. R - Amount of each payment in an annuity.
6. r - rate of annuity
7. m – period per year
8. n – number of payment in the annuity
(n=mxt)
9. i – interest per conversion period (i= r/m)
10. FV – future value of ordinary simple Annuity.
11. PV – present value of ordinary simple
annuity.
Ordinary Simple Annuity

Future Value of an Annuity

𝟏+𝒊 𝒏−𝟏
𝑭𝑽 = 𝑹
𝒊
Present Value of an Annuity
𝟏− 𝟏+𝒊 −𝒏
𝑷𝑽 = 𝑹
𝒊
Example
1. Find the future amount
and present value of an
annuity of Php 2,000 payable
for 3 years at 10%
compounded semi-annually.
Given
R = Php 2,000
t = 3 years
r = 10% or 0.10
m=2

FV = Php 13,603.83
PV = Php 10, 151.38
Example
2. Luke invested the amount of
Php 500 in a small cooperative
which at the end of each
quarter for 1 ½ year earns 5%
compounded monthly. What is
the future amount of an annuity?
Given
R = Php 500
t = 1.5 years
r = 5% or 0.05
m = 12

FV = Php 9,325.95
Example
3. Maurine is paying Php 3,550 per
quarter for a brand new automatic
washing machine which needs to
pay for 1 year and 3 months. If she
will pay in cash, how much she
needs to pay if the interest rate is
12% compounded quarterly.
Given
R = Php 3,550
t = 1.25 years
r = 12% or 0.12
m= 4

PV = Php 16,257.96
Simple Deferred Annuity
- An annuity in which payment
of interval is postponed or
deferred fo a period of time.
the period of deferred is the
number of period the annuity is
delayed.
 Terms and Notation
1. d - number of compounding intervals in
deferred period (𝑑 = 𝑚𝑡𝑑 )
𝑟
2. i – interest per period conversion (𝑖 = )
𝑚
3. t – time
4. 𝑡𝑑 − time of deferred
5. n – number of payment in deferred annuity
6. R – amount of each payment in a deferred
annuity.
7. 𝐹𝑉𝑑𝑒𝑓 - future value of deferred annuity
8. 𝑃𝑉𝑑𝑒𝑓 - present value of deferred annuity
 Simple Deferred Annuity

Future Value of Simple Deferred Annuity

𝒏
𝟏+𝒊 −𝟏
𝑭𝑽𝑑𝑒𝑓 = 𝑹
𝒊
Present Value of Simple Deferred
Annuity
𝟏− 𝟏+𝒊 −𝒏
𝑷𝑽𝑑𝑒𝑓 =𝑹 (𝟏 + 𝒊)−𝒅
𝒊
Example
1. Find the present value of a
deferred annuity of Php 120
every 6 months for 6 years is
deferred by 2 years with
interest rate of 5 % converted
semi-annually.
Given
R- Php 120
r – 5% or 0.05
t – 6 years
𝑡𝑑 - 2 years
m–2
i – 0.025
d–4
n - 12
𝑷𝑽𝑑𝑒𝑓 = 𝑃ℎ𝑝 1,115.16
 Example
2. Mark is planning to save in an
investment firm for his retirement. He
wishes to have Php 10,000 every month
after his retirement in the end of 4 years,
and the last payment at the end of 15
years. The investment firm offers 6%
compounded monthly. Find the amount
of investment.
Given
R- Php 10,000
r – 6% or 0.06
t – 15-4= 11 years
𝑡𝑑 - 4 years or 48 months
m – 12
i – r/m= 0.06/12=0.005
n- 12x11= 132+1 (since the first payment is at the
end of 4 years)
d - mx 𝑡𝑑 =12x4=48-1=47 (since end of 4 years)

𝑷𝑽𝑑𝑒𝑓 = 𝑃ℎ𝑝767,102.95
General Annuity
- Payment intervals are
not equal to the
compounding periods.
 Notation
1. r - rate of annuity
2. m – period per year
3. t – time
4.p − number of payment
5. n – number of payments in the annuity(n=t x
p)
𝑟
6. i – interest per conversion period (𝑖 = )
𝑚
7. 𝑐 − periodic interest per payment (c= m/p)
8. 𝑅 −amount of each payment in an annuity.
9. FVg – future value of general annuity.
10. PVg – present value of general annuity.
Formula
Future Value of General Annuity

𝟏 + 𝒊 𝒄𝒏 − 𝟏
𝑭𝑽𝒈 = 𝑹
𝟏+𝒊 𝒄−𝟏
Present Value of General Annuity
𝟏 − 𝟏 + 𝒊 −𝒄𝒏
𝑷𝑽𝒈 = 𝑹
𝟏+𝒊 𝒄−𝟏
Example
1. Find the future value of an
annuity of php 5000 payable
at the end of each year for 5
years if the interest rate is 5%
compounded quarterly.
Given
R – php 5000
t=5years
m=4
p=1
r=5% or 0.05
n=txp=5x1=5
c=m/p=4/1=4
i=r/m=0.05/4=0.0125

FVg = php 27,680.38

Example
2. Jayjay deposit an amount of
php 7,000 every end of the
quarter for 8 years in an
investment firm paying 15%
compounded semi-annually.
What future amount is in the
account at the end of the term.
GIVEN
R=php 7,000
t=8 years
m=2
p=4
r=15% or 0.15
n=txp=8x4=32
c=m/p=2/4=1/2
i=0.15/2=0.075

FVg= php414,576.18
EXAMPLE
Find the present value of an
annuity which pays php 750
at the end of every 6 months
for 5 years. If the interest rate
is 10% compounded
quarterly.
GIVEN
R=php750
1. Jen deposited Php 1,250 at the end
of the month for 4 years in her savings
account. The banks pay 6.5% interest
compounded quarterly. Find the future
value of her account.
2. Francis is planning to purchase a
food cart in installment basis in the
amount pf Php 1,000 a month for 1
year. What will be the equivalent
amount of the food cart if the interest
rate is 7% compounded semi-annually?
1. Find the future amount and present value of
an annuity of Php 2,000 payable for 3 years at
10% compounded semi-annually.
2. Luke invested the amount of Php 500 in a
small cooperative which at the end of each
quarter for 1 ½ year earns 5% compounded
monthly. What is the future amount of an
annuity?
3. Maurine is paying Php 3,550 per quarter for
a brand new automatic washing machine
which needs to pay for 1 year and 3 months. If
she will pay in cash, how much she needs to
pay if the interest rate is 12% compounded
quarterly.
1. Find the present value of a deferred
annuity of Php 120 every 6 months for 6
years is deferred by 2 years with interest
rate of 5 % converted semi-annually.
1. Find the future value of an annuity of
php 5000 payable at the end of each year
for 5 years if the interest rate is 5%
compounded quarterly.
2. Jayjay deposit an amount of php 7,000
every end of the quarter for 8 years in an
investment firm paying 15% compounded
semi-annually. What future amount is in the
account at the end of the term.
3. Find the present value of an annuity
which pays php 750 at the end of every 6
months for 5 years. If the interest rate is 10%
compounded quarterly.