Simple Annuity

Objectives:
 Define annuity payment
 Identify different types of annuity
 Find the future value and present value of simple annuities
DEFINITIONS:
Annuity - a fixed sum of money paid to someone at regular
intervals, subject to a fixed compound interest rate.

Annuity Certain – payable for a definite duration. Begins

and ends on a definite fixed date.

Annuity Uncertain – annuity payable for an indefinite

duration.

Simple Annuity – interest conversion or compounding

period is equal or the same as the payment interval.
General Annuity - interest conversion or compounding
period is unequal or not the same as the payment interval.

Ordinary Annuity – annuity in which the periodic

payment is made at the end of each payment interval.

Annuity Due – an annuity in which the periodic payment is

made at the beginning of each payment interval.

Deferred Annuity – the periodic payment is not made at

the beginning nor at the end of the payment interval. But
some later date.
General Ordinary Annuity – first payment is made at
the end of every payment interval.

General Annuity Due – first payment is made at the

beginning of every payment interval.

Perpetuities – a series of periodic payments which are to

run infinitely or forever.
 Annuity

Annuity Types
Annuity
Certain Uncertain

Simple General
Kinds
Annuity Annuity

Deferred General Ordinary

Ordinary Annuity
Annuity Perpetuities
Annuity

Classifications General
Annuity Due
Annuity Due
Example 1
Determine if the given situations represent
simple annuity or general annuity
a. Payments are made at the end of each month
for a loan that charges 1.05% interest
compound quarterly.
b. A deposit of P5,500.00 was made at the end of
every three months to an account that earns
5.6% interest compound quarterly.
Example 2
Determine whether the situation describes an ordinary
annuity or an annuity due.
a. Jun’s monthly mortgage payment is P35,148.05 at the
end of each month
b. The rent for the apartment is P7,000.00 and due at the
beginning of each month.

The FUTURE VALUE of an annuity is the total

accumulation of the payments and interest earned.

The PRESENT VALUE of an annuity is the principal that

must be invested today to provide the regular payments of
an annuity.
Formula:
Future Value of Simple Ordinary Annuity
FV = P·
Where:
FV = Future Value or Amount in
P = Periodic Payment
i = Interest rate per period
where i = , r = annual rate, m = periods
n = total number of conversion periods
n = m·t, t = number of years
Formula:
Present Value of Simple Ordinary Annuity
PV =
Where:
PV = Present Value or Amount
P = Periodic Payment
i = Interest rate per period
where i = , r = annual rate, m = periods
n = total number of conversion periods
n = m·t, t = number of years
Example 3
1. If you pay P50.00 at the end of each month for 40 years
on account that pays interest at 10% compounded
monthly, how much money do you have after 40 years?
Example 4
2. Alex and Tony are twins. After graduation and being
finally able to get a good job, they plan for retirement as
follows
a. Starting at age 24, Alex deposits P10,000.00 at the end of
each year for 36 years.
b. Starting at age 42, Tony deposits P20,000.00 at the end of
each year for 18 years.
Who will have the greater amount at retirement if both
annuities earn 12% per year compounded annually?
Example 5
1. Rose works very hard because she wants to have enough
money in her retirement account when she reaches the
age 60. She wants to withdraw P36,000.00 every 3
months for 20 years starting 3 months after she retires.
How much must Rose deposit at retirement at 12% per
year compounded quarterly for the annuity?

2. Fernan borrows money to buy a motorcycle. He will

repay the loan by making monthly payments of P1,500
per month for the next 24 months at an interest rate of
9% per year compounded monthly. How much did
Fernan borrow? How much interest does Fernan pay?
 Simple Annuity
Objectives:
 Define annuity payment
 Identify different types of annuity
 Find the future value and present value of simple annuities
 Annuity

Annuity Types
Annuity
Certain Uncertain

Simple General
Kinds
Annuity Annuity

Deferred General Ordinary

Ordinary Annuity
Annuity Perpetuities
Annuity

Classifications General
Annuity Due
Annuity Due
Annuity Due – an annuity in which the periodic payment is
made at the beginning of each payment interval.

Formula:
Future Value of Simple Annuity Due
FV =
Where:
FV = Future Value or Amount
P = Periodic Payment
i = interest rate per period
i=
n = total number of conversion periods
n = m(t); m = period, t = time
Example 1
1. Suppose Mr. and Mrs. Mariano deposited P20,000.00 at the
beginning of each year for 5 years in an investment that earns
10% per year compounded annually, what is the amount or
future value of the annuity?
2. Romano’s parents saved for his college education by
investing P12,000.00 at the beginning of each year in an
education plan that earns 6% per year compounded annually.
What is the total amount of investment at the end of 16 years?
3. Consider the given annuities:
Annuity A: P1,000.00 deposited at the beginning of each
month for 3 years at 12% compounded monthly.
Annuity B: P3,000.00 deposited at the beginning of each
quarter for 3 years at 12% compounded quarterly.
Calculate the amount of each annuity and compare the two.
Formula:
Present Value of Simple Annuity Due
PV =
Where:
PV = Present Value or Amount
P = Periodic Payment
i = interest rate per period
i=
n = total number of conversion periods
n = m(t); m = period, t = time
Example 2
1. Hope borrows money from the renovation of her house
and repays by making yearly payments of P50,000.00 at
the beginning of each year for a period of 10 years at an
interest rate of 8% compounded annually. How much
did Hope borrow?

Exercises:
Find the future value and present value of each annuity
due
2. P = P30,000; R = 3%; M = Annually; T = 2 years
3. P = P80,000; R = 4%; M = Annually; T = 5 years
4. P = P120,000; R = 2.5%; M = Quarterly; T = 3 years
 Regular Payment (P) of an Annuity
Formula:
Regular Payment of Simple Ordinary Annuity

Where:
FV = Future Value
PV = Present Value
i = interest rate per period
i = ; r = rate, m = period
n = total number of conversion period
n = m(t); m = period, t = time
Example 1
Eva obtained a loan of P50,000 for the tuition fee of her
son. She has to repay the loan by equal payments at the end
of every six months for 3 years at 10% interest compounded
semi-annually. Find the periodic payment.

PV = P50,000.00
R = 10%
T = 3 years
M = 2 periods
 Regular Payment (P) of an Annuity
Formula:
Regular Payment of Simple Annuity Due

Where:
FV = Future Value
PV = Present Value
i = interest rate per period
i = ; r = rate, m = period
n = total number of conversion period
n = m(t); m = period, t = time
Example 2
Mary borrows P500,000.00 to buy a car. She has two
options to repay the loan. The interest is compounded
monthly.
OPTION 1: 24 monthly payment every beginning of the
month at 12% per year.
OPTION 2: 60 monthly payment every end of the month
at 15% per year.
Find Mary’s monthly payments under each option.