ANNUITIES SIMPLE ANNUITY

LEARNING OBJECTIVES

At the end of the lesson, the learner is

able to illustrate simple and general
annuities, distinguish between simple
and general annuities, and find the future
and present values of simple annuities.
Where does people pay instalments?
ANNUITY

- a sequence of payments made at

equal (fixed) intervals or periods of
time.
PAYMENT INTERVAL
- the time between successive payments

TERM OF AN ANNUITY, (T) -

- time between the first payment interval
and last payment interval
REGULAR OR PERIODIC
PAYMENT, R
- the amount of each payment

AMOUNT (FUTURE VALUE) OF

AN ANNUITY, F
- sum of future values of all the payments
to be made during the entire term of the
annuity.
PRESENT VALUE OF AN
ANNUITY, P
- Sum of present values of all the
payments to be made during the
entire term of the annuity.
 CLASSIFICATION OF ANNUITIES:
1. According to payment interval and interest
period
A. SIMPLE ANNUITY – payment interval is
the same as the interest period.

B. GENERAL ANNUITY – payment interval

is not the same as the interest period.
 CLASSIFICATION OF ANNUITIES:
2. According to time of payment
A. ORDINARY ANNUITY (Annuity
Immediate)
- payments are made at the end of
each payment interval.

B. ANNUITY DUE – payments are made at

beginning of each payment interval.
 CLASSIFICATION OF ANNUITIES:
3. According to Duration
A. ANNUITY CERTAIN – payments
begin and end at definite times.

B. CONTINGENT ANNUITY –
payments extend over an indefinite (or
indeterminate) length of time.
 Example of Simple Annuity Immediate:

1. Suppose Mrs. Remoto would like to save

P3,000 at the end of each month, for six months,
in a fund that gives 9% compounded monthly.
How much is the amount or future value of her
savings after 6 months?
 Solution:
Given:
R = P3,000
term (t) = 6 months
interest rate per annum
number of conversions per year m = 12
interest rate per period
Find: amount (future value) at the end of the term,
F
 Solution:

(1) Illustrate the cash flow in a time diagram

3,000 3,000 3,000 3,000 3,000 3,000

0 1 2 3 4 5 6
 Solution:
(2) Find the future value of all the payments at the end of
the term (t=6)
3,000 3,000 3,000 3,000 3,000 3,000
0 1 2 3 4 5 6 3,000
3,000(1+0.0075)
3,000(1+0.0075)^2

3,000(1+0.0075)^3

3,000(1+0.0075)^4

3,000(1+0.0075)^5
 Solution:
(3) Add all the future values obtained from the
previous step.
3,000
= 3,000
(3,000)(1+0.0075) = 3,022.5
(3,000)(1+0.0075)^2 = 3,045.169
(3,000)(1+0.0075)^3 = 3,068.008
(3,000)(1+0.0075)^4 = 3,091.018
(3,000)(1+0.0075)^5 = 3,114.20
 AMOUNT (FUTURE VALUE) OF AN
ORDINARY ANNUITY ( ANNUITY
IMMEDIATE)

Where R is the regular payment

is the interest rate per period and
n is the number of payments
Example
1. In order to save for her high school graduation,
Marie decide to save P200 at the end of each month.
If the bank pays 0.250% compounded monthly,
how much will her money be at the end of 6 years?

P14,507.02
 PRESENT VALUE OF AN ORDINARY
ANNUITY (ANNUITY-IMMEDIATE)

Where
R is the regular payment
j is the interest rate per period
n is the number of payments
 CASH VALUE OR CASH PRICE

- Is equal to the down payment (if there is

any) plus the present value of the installment
payments.
Example:
Mr. Ribaya paid P200,000 as down payment
for a car. The remaining amount is to be
settled by paying P16,200 at the end of each
month for 5 years. If interest is 10.5%
compounded monthly, what is the cash price
of his car?
P953,702.20
Example 2
Paolo borrowed P100,000. He agrees to pay
the principal plus interest by paying an equal
amount of money each year for 3 years. What
should be his annual payment if interest is 8%
compounded annually?
P38,803.35 every year for 3 years
Example 3: Find F and P
a. Quarterly payments of P2,000 for 5 years
with interest rate of 8% compounded
quarterly. F = P48,594.74
P=32,702.87
b. Semi-annual payments of P8,000 for 12
years with interest rate of 12%
compounded semi-annually.
F = P406,524.60 P=100,402.90
Example 4:
1. A P50,000 loan is payable in 3 years. To
repay the loan, the debtor must pay an amount
every 6 months with an interest rate of 6%
compounded semi-annually. How much
should he pay every 6 months?
R = P9,229.88
SEATWORK:
1. Peter started to deposit P5000 quarterly in a
fund that pays 1% compounded quarterly.
How much will be in the fund after 6 years?

2. The buyer of a lot pays P50,000 cash and

P10,000 every month for 10 years. If money is 8%
compounded monthly, how much is the cash value
of the lot?
SEATWORK:
3. How much should be invested in a fund
each year paying 2% compounded annually to
accumulate P100,000 in 5 years?
PLATE #5:
1. The buyer of a car pays P169,000 cash and P12,000 every
month for 5 years. If money is 10% compounded
monthly, how much is the cash price of the car?
2. To pay for his debt at 12% compounded quarterly, Ruben
committed for 8 quarterly payments of P28,491.28 each.
How much did he borrow?
3. A television (TV) set is for sale at P13,499 in cash or on
instalment terms, P2,500 each month for the next 6
months at 9% compounded monthly. If you were the
buyer, what would you prefer cash or instalment? Why?