MATHEMATICS

OF INVESTMENT
By: MICHAEL T. LUMAWIG
6 ANNUITY
NATURE OF
ANNUITY Annuity refers to a sequence or series of equal payments made at an
equal interval of time.
The definition identifies the elements of annuity as follows:
1. Sequence or series of payments
2. Payments are equal of amount
3. Made at an equal interval of time
TERM OF THE
ANNUITY refers to the period of time from the beginning of the first payment
interval up to the last payment interval.
PERIODIC
PAYMENT is the size or value of each payment.
PAYMENT
INTERVAL is the time between two successive periodic payments.
6 ANNUITY
KINDS OF
ANNUITIES:
ANNUITY
1
CERTAIN It is an annuity with definite term. The first and last payment
intervals have definite dates.
ANNUITY
2
UNCERTAIN It is an annuity with an indefinite term. The first payment
interval has a definite date, but the last payment interval cannot be determined.

ORDINARY
3
ANNUITY It is an annuity where periodic payments are made at the end of
the payment interval.
ANNUITY
4
DUE It is an annuity where periodic payments are made at the beginning of
the payment interval.
6 ANNUITY
KINDS OF
ANNUITIES:
DEFERRED
5
ANNUITY It is an annuity where the first periodic payment begins other than
the first payment interval.

SIMPLE
6
ANNUITY It is an annuity where payment intervals coincide with the interest
compounding period.
COMPLEX
7
ANNUITY It is an annuity where payment intervals do not coincide with the
interest compounding period.
6 ANNUITY
ORDINARY ANNUITY
An annuity is considered an ordinary annuity when the periodic
payments are made at the end of payment intervals.
The amount of ordinary annuity is the sum of all periodic payments and the
compound interest for a given period of time.
The present value of ordinary annuity refers to the sum of the present value of all
periodic payments.

Fa =A Pa =A

Where: Pa – Compound amount or sum of an annuity

Fa – Compound amount or sum of an annuity
A – Annuity payment
i – Periodic interest rate
n – total compounding periods
EXAMPLE
Finding the Amount of Ordinary Annuity
35
QUESTION
:
Mae deposited ₱10,000 every end of the quarter for 1 year at 12% compounded
quarterly. Determine the amount at the end of the term.
SOLUTION
:
CASH FLOW
DIAGRAM:
Fa =10,000(1 + )3 + 10,000(1 + )2
₱10,000
₱10,000
+ 10,000(1 + )1 + 10,000
₱10,000
₱10,000 Fa = ₱41,836.27

0 1 2 3 4 Fa = A
QUARTER

Fa =10000
Fa = ₱41,836.27
EXAMPLE
Finding the Present value of Ordinary Annuity
36
QUESTION
: Mae deposited ₱10,000 every end of the quarter for 1 year at 12%
compounded quarterly. Determine the present value of the ordinary annuity.

SOLUTION
:
CASH FLOW
DIAGRAM:
Pa =10,000(1 + )-1 + 10,000(1 + )-2

₱10,000 + 10,000(1 + )-3 + 10,000(1 + )-4

₱10,000
₱10,000 Pa = ₱37,170.98
₱10,000

0 1 2 3 4 Pa =A
QUARTER

Pa = 10000
Pa = ₱37,170.98
EXAMPLE
Finding the Periodic Payment of Ordinary Annuity
37
QUESTION
: Arianne bought a motorcycle with a cash price of ₱70,000. She made a down
payment of ₱20,000, and the balance is payable in 4 quarterly payments. If
money is worth 12% compounded quarterly, find the quarter payment.

SOLUTION
GIVEN: :

Pa = ? Pa = A
Int. = quarterly
r = 12% A = Pa
f=4
A = (70,000-20000)

A = ₱13,451.35
EXAMPLE
Finding the Periodic Payment of Ordinary Annuity
38
QUESTION
: Jocelyn plans to construct her house at an estimated cost of ₱500,000 a year.
If money is worth 12% compounded quarterly, how much will she deposit every
end of the quarter for 1 year?

SOLUTION
GIVEN: :

Fa = ? Fa = A
Int. = quarterly
r = 12% A = Fa
f=4
A = (500,000)

A = ₱119, 513.52