Lesson 8

ANNUITIES

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Time Value of Money

That’s right! A dollar
Interest is the today is more valuable
rent paid for the use than a dollar to be
of money over time. received in one year.

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Basic Annuities

An annuity is a series of equal

periodic payments.

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Ordinary Annuity

An annuity with payments at the end of the

period is known as an ordinary annuity.

End End

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Annuity Due

An annuity with payments at the beginning of

the period is known as an annuity due.

Beginning Beginning Beginning

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 Jun’s monthly mortgage payment is P 35 148.05

at the end of each month.

ORDINARY ANNUITY

 The rent for the apartment is P 7 000.00 and due at the

beginning of each month.

ANNUITY DUE

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It is the interest conversion It is the interest conversion

or compounding period or compounding period is
is equal or the same as unequal or not the same as
the payment interval. the payment interval.

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 Payments are made at the end of each month

for a loan that charges 1.05% interest
compounded quarterly.
GENERAL ANNUITY
 A deposit of P 5 500.00 was made at the end of every three
months to an account that earns 5.6% interest compounded
quarterly.
SIMPLE ANNUITY

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SIMPLE ORDINARY ANNUITY

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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 annuity.

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SIMPLE ORDINARY ANNUITY

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E X A M P L E:

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?

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E X A M P L E:
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 P 36 000.00 every 6
months for 20 years starting 3 months after she retires. How much Rose deposit at
retirement at 12% per year compounded quarterly for the annuity?

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SIMPLE ANNUITY DUE

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E X A M P L E:

Suppose Mr. and Mrs. Mariano deposited P 20 000 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?

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E X A M P L E:

Romano’s parents saved for his college education by investing P 12

000 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?

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E X A M P L E:
Hope borrows money for the renovation of her house and repays by making
yearly payments of P 50 000.00 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?

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REGULAR PAYMENT OF AN
ANNUITY

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E X A M P L E:

Mary borrows P 500 000 buy a car. She has two points to repay her loan. The interest is
compounded monthly.
Option A: 24 monthly payments every beginning of the month at 12% per year
Option B: 60 monthly payments every end of the month at 15% per year.
Find: a. Mary’s monthly payments under each option
b. The interest Mary pays under each option

(Regular Payment (P) of a Simple Annuity Due Formula)

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E X A M P L E:

Mary borrows P 500 000 buy a car. She has two points to repay her loan. The interest is
compounded monthly.
Option A: 24 monthly payments every beginning of the month at 12% per year
Option B: 60 monthly payments every end of the month at 15% per year.
Find: a. Mary’s monthly payments under each option
b. The interest Mary pays under each option

(Regular Payment (P) of a Simple Ordinary Annuity Formula)

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b. The interest paid is the difference between

the total number paid and the principal borrowed.
For Option 1: 24 payments of P 23 303.70: 24 x 23 303.70 = P 559 288.50.
Total interest paid is P 559 288.50 – P 500 000 = P 59 288.80.
Thus, the total interest paid is P 59 288.80.
For Option 2: 60 payments of P 11 894.97: 60 x 11 894.97 = P 713 698.20.
Total interest paid is P 713 698.20 – P 500 000 = P 213 698.20.
Thus, the total interest paid is P 213 698.20.

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E X A M P L E:

Eva obtained a loan of P 50 000 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.

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E X A M P L E:

Exponent Corporation is required to pay 8 annual installments of P 2 500 000.00

each for a loan to pay for expansion at 12% compounded annually. How much is
the loan? Construct the amortization schedule.

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A deferred annuity is an annuity

in which the first payment is not
made
at the beginning nor at the end of
the
payment interval
but at a later date.

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DEFERRED ANNUITY

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E X A M P L E:

Find the present value of 10 semi-annual payments of

P 2 000.00 each if the first payment is due at the end of 3 years and
money is worth 8% compounded semi-annually.

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GENERAL ANNUITY

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E X A M P L E:

P 25 000.00 will be invested in an account at the end of each year

at 4% compounded semi-annually. Find the size of the fund at the
beginning of the 16th year.

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E X A M P L E:

Find the present value of an ordinary annuity of P 2 000 payable

annually for 9 years if the money is worth 5 % compounded
quarterly.

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