Lesson 9 Equivalent Rates and Annuity

Content:
ANNUITIES
(cont. of Compound Interest)
Senior High School
Mass Training of Teachers
On Academic Track
STEM III-A (Mathematics)
Objectives
After this session, you are expected to:
1. illustrate simple and general annuities.
2. distinguish between simple and
general annuities.
3. find the future value and present value
.
of both simple annuities and general

annuities.
DEPARTMENT OF EDUCATION
Review!
Review!
• Simple Interest
• Fs = P(1 + rt)
• Is = F s - P
Annuity
Annuity - refers to a sequence or series of
equal payments made at an equal interval of
time.
Elements of Annuity:
1. Sequence or series of payments.
.
2. Payments are of equal amount.
3. Made at an equal interval of time.
Annuity
Note:
1. If one element is missing, the payment is
NOT considered as an annuity.
2. If the series of payments of equal amount
were made but not of equal interval of time,
.
then the payment is NOT considered as an
annuity.
Annuity
Note:
3. If payment is done at equal interval but of
unequal amount, the payment is NOT
considered as an annuity.
.
Annuity
Application
- premiums of life insurances
- periodic payments on rentals
- purchase of cars or houses
- interest payment on bonds
.
- payments on household appliances

purchased on installment
Annuity
Term (term of annuity) (t) - refers to the
period of time from the beginning of the first
payment interval up to the last payment
interval.
Periodic Payment - refers to the size or value
of each payment. .
Annuity
Payment Interval - refers to the time between
two successive periodic payments.
Two Types of Annuity
Simple or Ordinary Annuity- the payment interval is
the same as the interest period
Ex. Installment payment for appliances at the end
of each month with interest compounded monthly
General Annuity- the payment interval is not the
same as the interest period
.
Ex. Installment payment for appliances at the end

of each month with interest compounded
annually
Amount of Ordinary Annuity
• It refers to the sum of the compound
amounts of several payments from the first
interval payment to the end of the term.
• It is the sum of all periodic payments and
the compound interest for a given period of
time. .
• It refers to the future value of compounded
periodic payments at a given interest rate.
Annuity
Illustrative Problem:
Mae deposited Php10,000 every end of the
quarter for 1 year at 12% compounded
quarterly.
Required: Determine the
. amount at the end of
the term.
Annuity
A. Beginning balance 0 10,000 20,300 30,909
B. Interest 0.12 / 4 = 0.03 - 300 609 927.27
C. Periodic payment 10,000 10,000 10,000 10,000
D. Sum end of periods 10,000 20,300 30,909 41,836.27
F = 𝐴¿¿
where, F = Compound amount or sum
of an annuity .
A = Annuity payment
( m)
i
=
m Periodic interest rate
mt = Total compounding periods
Mae deposited Php10,000 every end of the
quarter for 1 year at 12% compounded
quarterly.
Required: Determine the
. amount at the end of
the term.
Data:
A = Php10,000
i ( m)
m
= (0.12 / 4) = 0.03
mt = (4 )(1) = 4
.
Find:
F = Compound amount
F = 𝐴¿¿ 4
(1  0.03)  1
F  Php 10,000 .
0.03
F  Php 41,836.27
Present Value of Ordinary Annuity
• It refers to the sum of the present value of
all periodic payments, each payment is
discounted from the time of payment to the
beginning of the term.
.
• It determines the required amount at the
beginning of the term, compounded during
the entire period, which will satisfy the
required periodic payment every payment
interval.
.
• It is an effective investment tool to determine
the required amount to be established for
the payment of a specified obligation at a
specific or fixed date.
.
P = 𝐴1−¿¿
where, P = Present value of an annuity
.
A = Annuity payment
( m)
i
=m Periodic interest rate
-mt = Total compounding periods
Find the present value of an ordinary annuity
of P10,000 at 12% compounded quarterly for 1
year.
.
Find the present value of an ordinary annuity
of P10,000 at 12% compounded quarterly for 1
year.
.
Analysis:
We need to find for the lump-sum amount that should be set-up at the
beginning of the term, which will be compounded quarterly at 12% for 1
year, giving a periodic payment of P10,000 .
Data:
A = Php10,000
i ( m)
m
= 0.12 / 4 = 0.03
-mt = -(4 ) (1) = - 4
.
Find:
P = Present value
P = 𝐴1−¿¿
1  (1  0.03) -4
P  Php 10,000 .
0.03
P  Php 37,171.00
Periodic Payment of Ordinary Annuity
The periodic payment or annuity payment may
be determined provided the following are
given:
1. Present value or the maturity value
2. Compounding period..
3. Interest rate
If the present value is given:
( 𝑚)
𝑖
𝑚
A = P
1 − ¿¿
.
where, P = Present value of an annuity
A = Annuity payment
( m)
=i m Periodic interest rate
If the maturity value is given:
( 𝑚)
𝑖
𝑚
A = F
where, 1 − ¿¿
F = Compound amount or sum
.
of an annuity
A = Annuity payment
( m)
i
=m Periodic interest rate
Carlo bought a motorcycle with a cash price
of Php70,000. He made a down payment of
Php20,000, and the balance is payable in 4
quarterly payments. If money
. is worth 12%
compounded quarterly, find the quarterly
payment.
Analysis:
The Php 70,000 is the current price of the motorcycle;
hence it is the present value.
Data:
P = Php50,000
( m)
i
= 3%
m
-mt =- (4)(1)=-4
.
Find:
A = Annuity
( 𝑚)
𝑖
𝑚
A = P
1 − ¿¿
0.03
A  Php 50,000 -4
.
1  (1  0.03)
A  Php 13,451.35
Joan plans to construct her house at an
estimated cost of Php500,000 a year. If money
is worth 12% compounded quarterly, how
much will she deposit every
. end of the quarter
for 1 year?
Analysis:
The Php500,000 is the estimated cost of the house 1
year from now; hence it is the future amount or maturity
value.
.
Data:
F = Php500,000
( m)
i
m
= 0.12 / 4 = 0.03
-mt = -(4)(1) = -1
.
Find:
A = Annuity
(𝑚 )
𝑖
1+
𝑚
A = 𝐹
1−0.03
¿¿
A  Php 500,000 -4
1  (1  0.03)
.
A = Php 1 34 ,513.52
To prove:
That the annuity of Php 119,513.50 at 12%
compounded quarterly will result to Php 500,000 after 4
periods.
.
A. Beginning amount 0 119,513.52 242,612.45 369,404.34
B. Interest - 3,585.41 7,278.37 11,082.13
C. Annuity 119,513.52 119,513.52 119,513.52 119,513.52
D. Total 119,513.52 242,612.45 369,404.34 500,000
Evaluation:
1. Suppose Mrs. Remoto would like to P3,000 at the

end of each month, for 6 months, in a fund that
gives 9% compounded monthly. How much is the
future value of her savings after 6 months?
2. Suppose Mrs. Remoto would
. like to know the
present value of her monthly deposit of P3,000
when interest is 9% compounded monthly. How
much is the present value of her savings after 6
months?

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of both simple annuities and general

- payments on household appliances

Ex. Installment payment for appliances at the end

A. Beginning balance 0 10,000 20,300 30,909

B. Interest 0.12 / 4 = 0.03 - 300 609 927.27

C. Periodic payment 10,000 10,000 10,000 10,000

D. Sum end of periods 10,000 20,300 30,909 41,836.27

A = Php 1 34 ,513.52

A. Beginning amount 0 119,513.52 242,612.45 369,404.34

B. Interest - 3,585.41 7,278.37 11,082.13

C. Annuity 119,513.52 119,513.52 119,513.52 119,513.52

D. Total 119,513.52 242,612.45 369,404.34 500,000

1. Suppose Mrs. Remoto would like to P3,000 at the

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