Simple Annuity and General Annuity
Annuity Payment - If the payment for each period is fixed and the compound interest rate is fixed over
a specified time the payment is called annuity payment
Annuity - a sequence of payments made at equal (fixed intervals or periods of time
-Accounts associated with streams of annuity payments are called annuities.
The following are examples of annuities:
Rental payment
Monthly pensions
Monthly payment for car loan
Educational plan
Annuities may be classified in different ways, as follows.
Definition of Terms:
Periodic Payment (R) - Each payment in an annuity
Payment interval - The time between the successive payment dates of an annuity
term of the annuity (t) - The time between the first payment interval and last payment interval
future value or the amount of an annuity (F) - The sum of the future values of all the payments
to be made during the entire term of the annuity
present value of n annuity (P) - The sum of the present values of all payments to be made
during the entire term of the annuity
The formula for the present value and future value is summarized in the table below:
Type of Annuity Present Value Future Value
Simple Annuity- is a type
[
1−( 1+i )−n
] [ ]
n
(1+i) −1
of annuity in which the P=R F=R
i i
payment period is the Where: Where:
same as the interval P-Present Value P-Present Value
period (conversion R-periodic payment R-periodic payment
period). r-interest rate per period r-interest rate per period
r r
wherei= wherei=
Example: Monthly m m
payment where interest is i-annual rate i-annual rate
compounded monthly m-number of conversion period in a year m-number of conversion period in a year
where n=t(m) where n=t( m)
n-total number of conversion periods n-total number of conversion periods
t-number of years t-number of years
[ ] [ ]
General Annuity- is a type of 1−( 1+i )
−n
( 1+ i )n −1
annuity in which the P=R F=R
payment period is not the ( 1+ i )b −1 ( 1+i )b −1
same as the interval period Where Where
(conversion period). You will R-regular payment R-regular payment
be able to easily identify this. r-interest rate per period; r-interest rate per period;
r r
wherei= wherei=
Example: A four-year lease m m
agreement between Alfred i-annual rate i-annual rate
and Thrifty Mall Inc. (TMI) m-number of conversion period in a year m-number of conversion period in a year
indicates that, Alfred pays where n=t(m) where n=t( m)
TMI ₱100,000.00 at the end n-total number of conversion periods n-total number of conversion periods
of every year if the agreed t-number of years t-number of years
interest rate is 5% p p
whereb= whereb=
compounded quarterly c c
p-is the number of months in a payment p-is the number of months in a payment
interval interval
c-is the number of months in a c-is the number of months in a
compounding period. compounding period.
Name: ________________________________ Section: _____________
PRACTICE PROBLEMS
Simple Annuity and General Annuity
1. Find the Present Value (P) and the Future Value (F) of quarterly payments of ₱ 2,000.00
for 5 years with interest rate of 8% compounded quarterly.
2. How much should you invest in a fund each year paying 2% compounded annually to
accumulate ₱ 100,000.00 in 5 years?
3. Find the Present Value (P) and the Future Value (F) of semi-annual payments of ₱
8,000.00 for 12 years with interest rate of 12% compounded semi-annually.
4. Starting on her 30th birthday, a woman will invest an amount every year on her birthday
in an account that grows at an annual rate of 7%. What should be the amount invested
should she want her fund to ₱ 300,000.00 just before her 65th birthday?
5. The value of a car requires a ₱ 169,000.00 cash downpayment and a monthly payment
of ₱ 12,000.00 If money is computed at 10% compounded monthly, how much is the
cash price of the car payable in 5 years?
*Hint: CV or CP = Downpayment + Present Value
6. The buyer of a lot pays ₱ 50,000.00 cash and ₱ 10,000.00 every month for 10 years. If
money is 8% compounded monthly, how much is the cash price of the lot?
*Hint: CV or CP = Downpayment + Present Value
7. Payment of ₱ 500.00 is made at each year for 10 years. Interest has a nominal rate of
8% convertible quarterly. Find the present and the future value.
8. Annual payments of ₱1,000.00 at the end of each term for 8 years with interest rate of
6% compounded quarterly. Find the present and the future value.
9. What is the present value and future value of an annuity of ₱ 2,000.00 payable annually
for 9 years if the money is worth 5% compounded quarterly.
10. Find the present value and future value of an annuity of ₱ 10,000.00 payable semi-
annually for 5 years if money is worth 6% per year compounded quarterly.
11. What is the present value and future value of an annuity of ₱ 5,000.00 payable
quarterly for 10 years If money is worth 5% per year compounded annually?
