Annuities

At the end of this discussion we will able to:

• Understand the meaning of Annuity

• Identify and Understand the types of Annuity and its differences
• Determine the formula in computing for the future value of Annuity
What is Annuity?

A series of equal payments at fixed intervals for a specified number of

periods.
Types of Annuity

Ordinary (Deferred Annuity)

-an annuity whose payments occur at the end of each period.

Annuity Due
-An annuity whose payments occur at the beginning of each period
Future value of an ordinary annuity
Future Value of an Annuity – the future value of an ordinary annuity over the N periods.

Formula:

Step by Step Formula

FVAη= PMT(1+I)ⁿˉ¹ + PMT(1+I)ⁿˉ² + PMT(1+I)ⁿˉ³…….

OR
FVAη= PMT X ((1+I)ⁿ-1
I

Where= PMT= Payment amount or Cash Flow

i= Interest rate
N= No. of periods
eXAMPLE

Mrs. Tina Pa would like to deposit worth P100.00

bearing an interest rate of 5% annually at the end
of each year for 3 years. Mr. Odong Pa, the
husband, would like to determine if how much
money they will have after 3 years.

Compute for the Future Value of an Ordinary

Annuity.
Step by Step Approach:
P100.00(1+0.05)ˆ² + P100.00(1+0.05)ˆ¹ + P100.00(1+0.05)ˆ˚

P110.25+P105.00+P100.00

FVAη= P315.25

OR
Formula Derived:

PMTX ((1+0.05)ˆ³-1)/0.05

FVAη= P315.25
QUICK Question

Miss Wang Kig urged her sister Miss Ta Kig to begin a savings habit
early in her life. She suggested that her sister will put P5.00 per day
into an envelope. If her sister follow the advice, at the end of the year
her sister will have P1825.00 (365 days X 5.00) Miss Wang Kig further
suggested that her sister must take the money at the end of the year
and invest it in an online brokerage mutual fund account that has an
annual expected return of 8%.

Today, Miss Ta Kig is 18 years old. If she will start following her sister
Wang Kig’s advice today, and continue saving in her way the rest of her
life, how much do Miss Ta Kig expect to have in the brokerage account
when she will reach 65 years old?
FUTURE VALUE OF AN ANNUITY DUE

Future Value of an Annuity Due Formula

= (1+I)
Example:

= P315.25(1+.05)
=P315.25(1.05)
=P331.01

Can anyone EXPRESS YOUR ANALYSIS on this matter??????

Why does an annuity due always have a higher future value than an
ordinary annuity?
Quick question

Mr. Reynaldo San Dayong plans to buy a condo 5 years from now and
he needs to save for a down payment. He plan to save P2,500.00 per
year (with the first deposit made immediately), and he will deposit
funds in San Telmo Bank, located near at the railways of the Tren to
Butuan with an interest rate of 4% per annum. How much will Mr. San
Dayong have after 5 years? How much will Mr. San Dayong will have if
he make deposits at the end of each year?
Assignment:

Mrs. Nee Wang won the Florida Lottery. To receive her winnings, she
must select one of the two following choices:

1.She can receive P1,000,000.00 a year at the end of each of the next
30 years; OR
2.She can receive a one-time payment of P15,000,000.00 today.

Assume that the current interest rate is 6%. Which option is most
VALUABLE? And WHY? Defend your answer!!!!

Maraming Salamat and Mabuhay Kayong Lahat!