ANNUITY

Deferred Annuity
■ It is an annuity where payments are made late by several periods from the start of
annuity.

Period of Deferral
■ Time between the purchase of an annuity and the start of the payments for the deferred
annuity.

m periods

0 1 2 3 4 1
0’

A A A A A A
Deferred Annuity
■ It is an annuity where payments are made late by several periods from the start of
annuity.
m periods

0 1 2 3 4 1
0’

A A A A A A

Using 0 as focal date

Find the period of deferral in each of the following
deferred annuity problems:
■ Monthly payments of P2,000 for 5 years that will start 7 months from
now.

■ Annual payments of P8,000 for 12 years that will start 5 years from
now.

■ Semi-annual payments of P60,000 for 10 years that will start 5 years

from now.

■ Payments of P3,000 every 2 years for 10 years starting at the end of 6

years.
Sample Problem
A new generator has just been installed. It is expected that there will be no maintenance
charges until the end of 5th year, when P300 will be spent at the end of each successive year
until the generator is scrapped at the end of its 14th year of service. What sum of money set
aside at the time of installation of the generator at 6% will take care of all maintenance
expenses for the generator?

m=5

0 1 2 3 4 5 6 7 8 9 10 13 14

300 300 300 300 300 300

Note: There will be no maintenance cost at the 14th year since it is scrapped at that year.
Given:
A = 300
=6% 𝑃=1,392.10
Annuity Due
■ It is the annuity where the payments started at the beginning of the annuity periods.

Formula:

{ }
− (𝑛 − 1)
1 − ( 1 +𝑖 )
𝑃= 𝐴 +1
𝑖

𝐹=𝐴 { ( 1+ 𝑖 )( 𝑛+1) − 1
𝑖
−1 }
Annuity Due vs. Ordinary Annuity
An ordinary annuity is when a payment is made at the end of a period. An annuity due is
when a payment is due at the beginning of a period.
Sample Problem
■ A man bought a car costing P450,000 payable in 5 years at a rate of 24% compounded
semi-annually in installment basis. If each semi-annual payment is payable at the
beginning of each period, determine the amount of each payment.

{ }
− (𝑛 − 1)
1 − ( 1 +𝑖 )
𝑃= 𝐴 +1
𝑖
 Annuity with Continuous Compounding of Interest
Formula:

{ }{ }
𝑗𝑛 1 𝑗𝑛
𝑒 −1 1 −𝑒
𝐹 = 𝐴 𝑃
𝑗
= 𝐴 𝑗
𝑒 −1 𝑒 −1
Sample Problem:
A man deposits P500 each year into his savings account that pays 5% nominal interest
compounded continuously. How much will be the worth of the account at the end of 5 years?
Activity 1
■ Janna wants to have $52000 in her bank after 13 years. How much should she deposit if
the money is worth 15% compounded continuously?
■ Michael purchased a laptop in installment basis worth P25800 and he needs to pay
P3200 per beginning of the quarter with an interest rate of 2% compounded quarterly. H
]ow many quarters should he pay?
■ A company rent a building for P50,000 per month for a period of 10 years. Find the
accumulative amount of the rentals if the rental for each month is being paid at the start
of each month and money is worth 12% compounded monthly.
■ If P2,000 is deposited in a savings account at the beginning of each of 15 years and the
account draws interest at 7% per year, compounded annually. Find the value of the
account at the end of 15 years.
■ A condominium unit can be bought at a down payment of P150,000 and a monthly
payment of P10,000 for 10 years starting at the end of 5 th year from the date of the
purchase. If money is worth 12% compounded monthly, what is the cash price of the
condominium unit?