GENERAL ANNUITY

Goal 1: Find the future value

and present value of general
annuities
Starting Point

Amount and Present Value of an Annuity

The present value of an annuity is the principal
that must be invested today to provide the regular
payments of an annuity
The amount of an annuity is the sum of the
regular deposits plus interest.
Simple and General Annuities

A general annuity is an annuity wherein the

interest conversion period is unequal or not
the same as the payment interval
General Ordinary Annuity
Present Value of General Ordinary
Annuity
1-(1+i) -n

PV= P [_______________ ]
(1+i) b -1
P= regular payment
i=rate per conversion period
n= number of conversion periods
b= p/c, p is month(payment interval) and c is
months( compounding period)
Example:

Find the present value of an ordinary

annuity of P5 000.00 payable
annually for 6 years if the money is
worth 5% compounded quarterly.
Solution:
1-(1+i) -n

PV= P [_______________ ]
(1+i) b -1
1-(1+0.0125) -24
= 5 000 [____________________ ]
(1+0.0125) 4 -1
= P25 301.92
Future Value of General Ordinary Annuity
(1+i) n -1
FV= P [______________ ]
(1+i) b -1
P= regular payment
i=rate per conversion period
n= number of conversion periods
b= p/c, p is month(payment interval) and c is
months( compounding period)
Example:

P30 000.00 will be invested in an

account at the end of each year at
6% compounded semi-annually.
Find the size of the fund at the
beginning of 16th year.
Solution:
(1+i) -1n

FV= P [ ______________
]
(1+i) -1b

(1+0.03) -1 30

=[ __________________
]
(1+0.03) -1 2

= P 703 084.96
General Annuity Due

Present Value
1-(1+i) -n
i
PV=P [ ____________
] [ __________
+ i]
i (1+i) -1
b
Example:

Find the present value of an annuity

due of P15 000.00 payable quarterly
for 12 years if the money is worth
4% compounded semi-annually.
Solution:
1-(1+i) -n i
PV=P [____________ ] [ __________ + i]
i (1+i) b -1
1-(1+0.02) -24 0.02
[________________ ] [__________________ +0.02]
0.02 (1+0.02) 0.5 -1
= P575 914.99
Future Value of General Ordinary
Annuity

(1+i) n
-1 i
FV=P [ _____________
] [ + i]
___________

i (1+i) -1
b
Example:

Emma wants to save P100 000.00 for

her first year college. She deposits
P2 500.00 at the beginning of each
month in an account that earns 8% per
year compounded semi-annually. Will
Emma have enough money after 3
years?
Solution:

(1+i) n
-1 i
FV=P [ _____________
][___________
+ i]
i (1+i) -1b

(1+0.04) -1 6
0.04
[ __________________
] [ ________________
+ 0.04]
0.04 (1+0.04) -1 1/6

= P101 803.53
Regular Payment(P) for General
Annuity
For General Annuity
(1+i) b -1
P=PV [ __________________
]
1-(1+i) -n
Example:

A couple left their daughter with a

P500 000.00 insurance policy. What
monthly income would the policy provide
for 15 years if the insurance company pays
10% compounded semi-annually?
Solution:
(1+i) -1b

P=PV [ __________________
]
1-(1+i) -n

(1+0.05) 1/6 -1
= 500 000 [__________________ ]
1-(1+0.05) -30
= P5 311.35
 (1+i) -1
b

P=FV [ _____________
]
(1+i) -1
n
Example:

Mr. And Mrs. Salazar will need P250 000.00

in 2 years to start their own business. They
plan to save money by making monthly
deposits at the end of each month in an
account earning 12% per year compounded
quarterly. How much must they make
monthly?
Solution:
(1+i) b -1
P=FV [_____________ ]
(1+i) n -1
250 000[(1+0.03) 1/3 -1]
= ______________________________
(1+0.03) 8 -1
= P9 279.18