Lesson 1

Simple Annuity
 Objectives

At the end of this lesson, the learner should be able to

● accurately illustrate real-life situations involving

simple annuities;

● correctly determine if a real-life situation illustrates

the future value or the present value of a simple
annuity;
 Objectives

● correctly determine if a real-life situation illustrates

a simple ordinary annuity or a simple annuity due;
and

● correctly solve for the future value or the present

value of a simple annuity.
 Essential Questions

● What is a simple annuity?

● How will you know if the situation illustrates a future value

or a present value of a simple annuity?

● How will you know if the situation illustrates a simple

ordinary annuity or a simple annuity due?
 Essential Questions

● How will you solve for the future value or the present
value of a simple annuity?
 Warm Up!

Before we discuss annuities, let’s have a short drill on simple

interest problems by working on the following activity.

(Click the link to access the activity.)

Popovici, Doina. “Simple Interest Money Game.” Math Play.

Retrieved 30 April 2019 from https://bit.ly/2EEKBS9
 Guide Questions

• How do you solve problems involving simple interest?

• What is the difference between simple and compound

interest?
 Learn about It!

Annuity
1 a sum of money that is paid in regular equal payments

Example:

Installment payments, monthly rentals, and life insurance

premiums are annuities.
 Learn about It!

Payment Interval
2 the period of time between consecutive payments

Example:

Ged buys a new smartphone and agrees to pay it via

installment. He will pay ₱ every month for years. In this case,
the payment interval of the annuity is monthly.
 Learn about It!

Term
3 the time from the beginning of the first payment interval to the end of the last
payment interval

Example:

Ged buys a new smartphone and agrees to pay it via

installment. He will pay ₱ every month for years. In this case,
the term of the annuity is years.
Learn about It!

Types of Annuity Based on Payment Duration

4 1. Annuity Certain
2. Perpetuity
3. Contingent Annuity
 Learn about It!

4.1 Annuity Certain

It is an annuity payable for a definite duration. It means that this annuity begins
and ends on a definite date.

Example:

Arya buys a new laptop and agrees to pay through

installment. She will pay ₱ every month for years.
 Learn about It!

4.2 Perpetuity
It is an annuity payable over a term that has a definite start date but no definite
end date.

Example:

Payment of housing rent is a perpetuity.

 Learn about It!

4.3 Contingent Annuity

It is an annuity payable for an indefinite duration. It means that the beginning or
the termination is dependent on some certain event.

Example:

Insurance and pension payments are contingent annuities.

Learn about It!

Kinds of Annuity Certain

5 1. Simple Annuity
2. General Annuity
 Learn about It!

5.1 Simple Annuity

It is an annuity certain whose compounding period is the same as the payment
interval.

Example:

Leonard buys a brand-new TV with installment payment at

the end of each month with interest compounded monthly.
 Learn about It!

5.2 General Annuity

It is an annuity certain whose compounding period is not the same as the
payment interval.

Example:

Sheldon buys a brand-new TV with installment payment at

the end of each quarter with interest compounded annually.
Learn about It!

Types of Annuity Based on Time of Periodic Payment

6 1. Ordinary Annuity
2. Annuity Due
 Learn about It!

6.1 Ordinary Annuity

It is an annuity in which the periodic payment is made at the end of each payment
interval.

Example:

Sam buys a washing machine with installment payment at the

end of every month for one year.
 Learn about It!

6.2 Annuity Due

It is an annuity in which the periodic payment is made at the beginning of each
payment interval.
.

Example:

Gilly buys a washing machine with installment payment at the

beginning of every month for one year.
Learn about It!

Future Value of an Ordinary Annuity

7 It is the total of the payments and interest earned at the end of the term.
We use the following formula to calculate the future value of an ordinary annuity.

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year, and
total number of conversion periods for the whole term, given by , where is the
length of the term in years.
 Learn about It!

Example:
Ms. Garcia deposits ₱every end of the month and earns
interest compounded monthly. After years, her money is ₱.

• It is an ordinary annuity because Ms. Garcia pays at the

end of every month.
• The regular payment is ₱
• The interest rate is
 Learn about It!

Example:

• The number of compounding periods within a year is

• The periodic rate is .

• The total number of conversion periods for the whole term
is , where years.
• The future value is ₱.
Learn about It!

Present Value of an Ordinary Annuity

8 It is the principal that must be invested today to provide the regular payments for
the annuity. We use the following formula to calculate the present value of an
ordinary annuity.

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year; and
total number of conversion periods for the whole term, given by where is the
length of the term in years.
 Learn about It!

Example:
Jessie buys a new phone that costs ₱. The mode of payment is
installment for one year. She agrees to pay ₱at the end of
every month, and she is charged with a interest rate
compounded monthly.
• It is an ordinary annuity because Jessie pays at the end of
every month.
• The regular payment is ₱.
• The interest rate is .
 Learn about It!

Example:

• The number of compounding periods within a year is

• The periodic rate is .

• The total number of conversion periods for the whole term
is , where year.
• The present value is ₱17 061.76
Learn about It!

Future Value of an Annuity due

9 We use the following formula to calculate the future value of an annuity due:

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year; and
total number of conversion periods for the whole term, given by where is the
length of the term in years.
 Learn about It!

Example:
Ms. Lacerna deposits ₱at the beginning of every month that
earns interest compounded monthly. After years, her money
is ₱

• It is an annuity due because Ms. Lacerna at the beginning

of every month.
• The regular payment is ₱.
• The interest rate is .
 Learn about It!

Example:

• The number of compounding periods within a year is

.
• The periodic rate is .
• The total number of conversion periods for the whole term
is , where years.
• The future value is ₱
 Learn about It!

Present Value of an Annuity due

10 We use the following formula to calculate the present value of an annuity due:

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year; and
total number of conversion periods for the whole term, given by where is the
length of the term in years.
 Learn about It!

Example:
Janella buys a new phone that costs ₱. The mode of payment
is installment for one year. She agrees to pay ₱every
beginning of the month that charges interest rate
compounded monthly.
• It is an annuity due because she pays at the beginning of
every month.
• The regular payment is ₱.
• The interest rate is .
 Learn about It!

Example:

• The number of compounding periods within a year is

• The periodic rate is .

• The total number of conversion periods for the whole term
is , where year.
• The present value is ₱17 203.94
 Try It!

Example 1: Erika deposits ₱ at the end of every months in an

account that pays compounded quarterly. How much will the
amount in the account be after years?
 Try It!

Example 1: Erika deposits ₱ at the end of every months in an

account that pays compounded quarterly. How much will the
amount in the account be after years?

Solution:
1. Identify the given information from the problem.

The regular payment is .

The interest rate is or . The number of compounding periods

within a year is since the payment is done quarterly.
 Try It!

Example 1: Erika deposits ₱ at the end of every months in an

account that pays compounded quarterly. How much will the
amount in the account be after years?

Solution:
Thus, the periodic rate is .

The length of the term is 5 years or .

Thus, the total number of conversion periods for the whole
term is .
 Try It!

Example 1: Erika deposits ₱ at the end of every months in an

account that pays compounded quarterly. How much will the
amount in the account be after years?

Solution:
2. Determine the kind of annuity illustrated in the problem.

The situation illustrates the future value of the annuity since

we would like to know the value after 5 years. Moreover, it is
a simple ordinary annuity since the payment is done at the
end of every three months.
 Try It!

Example 1: Erika deposits ₱ at the end of every months in an

account that pays compounded quarterly. How much will the
amount in the account be after years?

Solution:
3. Solve for the future value of the ordinary annuity.
 Try It!

Example 1: Erika deposits ₱ at the end of every months in an

account that pays compounded quarterly. How much will the
amount in the account be after years?

Solution:
Thus, Erika will have ₱ in her account in years.
 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
Solution:
1. Identify the given information from the problem.

The regular payment is .

 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
Solution:
The interest rate is or . The number of compounding periods
within a year is since the payment is done monthly.
Thus, the periodic rate is .
 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
Solution:
The length of the term is 2 years or . Thus, the total number
of conversion periods for the whole term is
.
 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
Solution:
2. Determine the kind of annuity illustrated in the problem.

The situation illustrates the present value of the annuity since

we would like to know the present cash price of the
cellphone. Moreover, it is a simple annuity due since the
payment is done at the beginning of the month.
 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
Solution:
3. Solve for the present value of the annuity due.
 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
Solution:
 Try It!

Example 2: Mark purchased a cellphone via installment

payment that charges interest compounded monthly. He
agreed to pay ₱ every beginning of the month for two years.
What is the cash price of the cellphone?
Solution:
Thus, the cash price of the cellphone is ₱.
 Let’s Practice!

Individual Practice:

1. Mrs. Gamboa avails an educational plan payable for years

for her daughter. She agrees to pay ₱ at the end of every
month. The plan earns interest rate compounded
monthly. What amount will she receive after years?
2. Mr. Montes purchased a car for ₱ down payment and
regular payments of ₱ at the end of every three months for
two years. If the money is compounded by quarterly, find
the cash value of the car.
 Let’s Practice!

Group Practice: To be done in groups of four.

Mrs. Gutierrez wants to purchase a retirement plan. Two

companies offer different policies. In Company A, she has to
deposit ₱ at the beginning of every month. Her account will
earn a interest compounded monthly. In Company B, she
has to deposit ₱ at the end of every three months. Her
account will earn interest compounded quarterly. Both
policies are payable for years. Which of these policies should
she choose?
Key Points

Annuity
1 a sum of money that is paid in regular equal payments

Payment Interval
2 the period of time between consecutive payments

Term
3 the time from the beginning of the first payment interval to the end of the last
payment interval
 Key Points

Types of Annuity Based on Payment Duration

4

4.1 Annuity Certain

It is an annuity payable for a definite duration. It means that this annuity begins
and ends on a definite date.

4.2 Perpetuity
It is an annuity payable over a term that has a definite start date but no definite
end date.

4.3 Contingent Annuity

It is an annuity payable for an indefinite duration. It means that the beginning or
the termination is dependent on some certain event.
 Key Points

Kinds of Annuity Certain

5

5.1 Simple Annuity

It is an annuity certain whose compounding period is the same as the payment
interval.

5.2 General Annuity

It is an annuity certain whose compounding period is not the same as the
payment interval.
 Key Points

Types of Annuity Based on Time of Periodic Payment

6

6.1 Ordinary Annuity

It is an annuity in which the periodic payment is made at the end of each payment
interval.

6.2 Annuity Due

It is an annuity in which the periodic payment is made at the beginning of each
payment interval.
.
Key Points

Future Value of an Ordinary Annuity

7 It is the total of the payments and interest earned at the end of the term.
We use the following formula to calculate the future value of an ordinary annuity.

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year, and
total number of conversion periods for the whole term, given by , where is the
length of the term in years.
Key Points

Present Value of an Ordinary Annuity

8 It is the principal that must be invested today to provide the regular payments for
the annuity. We use the following formula to calculate the present value of an
ordinary annuity.

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year; and
total number of conversion periods for the whole term, given by where is the
length of the term in years.
Key Points

Future Value of an Annuity due

9 We use the following formula to calculate the future value of an annuity due:

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year; and
total number of conversion periods for the whole term, given by where is the
length of the term in years.
Key Points

Present Value of an Annuity due

10 We use the following formula to calculate the present value of an annuity due:

where,
regular or periodic payment,
periodic rate, given by , where is the interest rate and is the number of
compounding periods within a year; and
total number of conversion periods for the whole term, given by where is the
length of the term in years.
 Synthesis

● How do you solve for the future and present values of a

simple annuity?

● How does knowing the concept of annuity help you in

decision-making regarding finances?

● Do you think the steps in solving problems involving

general annuities would be similar to the steps in solving
problems involving simple annuities?