ANNUITIES

PREPARED BY: MR. JERRY MAE A. RANES

 LESSON OUTLINE
▪ Definition of Terms
▪ Time Diagrams
▪ Future Value of a Simple Annuity
▪ Present Value of a Simple Annuity
▪ Periodic Payment of a Simple Annuity
 ANNUITY
▪ A sequence of payments made at equal
(fixed) intervals or periods of time.

▪ Annuities may be classified in different ways,

as follows:
 ANNUITY ACCORDING TO PAYMENT
INTERVAL AND INTEREST PERIOD
▪ Simple Annuity - an annuity where the payment
interval is the same as the interest period.

▪ General Annuity - an annuity where the payment

interval is not the same as the interest period.
 SIMPLE ANNUITY EXAMPLE
A deposit of P5,500 was made at the end of
every three months to an account that earns
5.6% interest compounded quarterly.
 GENERAL ANNUITY EXAMPLE
Payments are made at the end of each month
for a loan that charges 1.05% interest
compounded quarterly.
 ANNUITY ACCORDING TO TIME OF
PAYMENT
▪ Ordinary Annuity (or Annuity Immediate) - a type
of annuity in which the payments are made at the
end of each payment interval.

▪ Annuity Due - a type of annuity in which the

payments are made at beginning of each payment
interval
 ORDINARY ANNUITY EXAMPLE

Jun’s monthly mortgage payment is P35,148.05

at the end of each month.
 ANNUITY DUE EXAMPLE

The rent of apartment is P7,000 and due at the

beginning of each month.
 ANNUITY ACCORDING TO
DURATION
▪ Annuity Certain - an annuity in which
payments begin and end at definite times.

▪ Contingent Annuity - an annuity in which the

payments extend over an indefinite (or
indeterminate) length of time.
 ANNUITY CERTAIN EXAMPLE
Emma, who just won a scholarship that pays her
P1,000 every month for the next four years to
support her education.
 CONTINGENT ANNUITY EXAMPLE
A company promises to pay its retired
employees a monthly annuity of P1,500.
However, if the company's profits for the year
exceed a certain threshold, the annuity payment
will increase to P2,000 per month.
 TIME DIAGRAM
Annuities may be illustrated using a time diagram. The
time diagram for an ordinary annuity (i.e., payments
are made at the end of the year) is given below.

TIME DIAGRAM FOR AN N-PAYMENT ANNUITY

𝑅 𝑅 𝑅 𝑅 𝑅 … 𝑅
0 1 2 3 4 5 … 𝑛
SIMPLE ANNUITY
PREPARED BY: MR. JERRY MAE A. RANES
 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 OF AN ANNUITY /
FUTURE VALUE 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
 AMOUNT OF SIMPLE
ANNUITY / FUTURE VALUE 𝑭
𝑚𝑡
𝑚
𝑖
1+ −1
𝑚
𝐹=𝑅 𝑚
𝑖
𝑚

Where: 𝑅 is the regular payment

𝑖 𝑚 is the nominal rate
𝑚 is the frequency of conversion
𝑡 is the term/time
 PRESENT VALUE OF A SIMPLE
ANNUITY 𝑷
−𝑚𝑡
𝑚
𝑖
1− 1+
𝑚
𝑃=𝑅 𝑚
𝑖
𝑚

Where: 𝑅 is the regular payment

𝑖 𝑚 is the nominal rate
𝑚 is the frequency of conversion
𝑡 is the term/time
PERIODIC PAYMENT 𝑹 OF AN
ANNUITY

𝑃 𝐹
𝑅= −𝑚𝑡 or 𝑅 = 𝑚𝑡
𝑖 𝑚 𝑖 𝑚
1− 1+ 1+ −1
𝑚 𝑚
𝑖 𝑚 𝑖 𝑚
𝑚 𝑚
 WORD PROBLEM #1
Suppose Mr. Salmorin would like to save P3,000 every
month in a fund that gives 9% compounded monthly.

▪ How much is the amount or future value of his

savings after 6 months?

▪ How much is the present value of his savings at

the end of 6 months?
 WORD PROBLEM #2
In order to save for her high school graduation,
Jasmine decided 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?
 WORD PROBLEM #3
Luis 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?
 CASH VALUE OR CASH PRICE
The cash value or cash price of a purchase is
equal to the down payment (if there is any) plus
the present value of the installment payments.
 WORD PROBLEM #4
Mr. Meneses 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?
GENERAL ANNUITY
PREPARED BY: MR. JERRY MAE A. RANES
 ANNUITY ACCORDING TO PAYMENT
INTERVAL AND INTEREST PERIOD
▪ Simple Annuity - an annuity where the payment
interval is the same as the interest period.

▪ General Annuity - an annuity where the payment

interval is not the same as the interest period.
 GENERAL ANNUITY EXAMPLE
Mr. Ranes saves P5,000 every 6 months in a
bank that pays 0.25% compounded monthly.
How much will be his savings after 10 years?
 GENERAL ORDINARY ANNUITY
A general annuity in which the periodic payment is
made at the end of the payment interval.

The formulas for 𝐹 and 𝑃 are same as those in

simple annuity. The extra step occurs in finding 𝑗:
the given interest rate per period must be
converted to an equivalent rate per payment
interval.
 AMOUNT OF SIMPLE
ANNUITY / FUTURE VALUE 𝑭
𝑚𝑡
𝑚
𝑖
1+ −1
𝑚
𝐹=𝑅 𝑚
𝑖
𝑚

Where: 𝑅 is the regular payment

𝑖 𝑚 is the nominal rate
𝑚 is the frequency of conversion
𝑡 is the term/time
 PRESENT VALUE OF A SIMPLE
ANNUITY 𝑷
−𝑚𝑡
𝑚
𝑖
1− 1+
𝑚
𝑃=𝑅 𝑚
𝑖
𝑚

Where: 𝑅 is the regular payment

𝑖 𝑚 is the nominal rate
𝑚 is the frequency of conversion
𝑡 is the term/time
PERIODIC PAYMENT 𝑹 OF AN
ANNUITY

𝑃 𝐹
𝑅= −𝑚𝑡 or 𝑅 = 𝑚𝑡
𝑖 𝑚 𝑖 𝑚
1− 1+ 1+ −1
𝑚 𝑚
𝑖 𝑚 𝑖 𝑚
𝑚 𝑚
 WORD PROBLEM #1
Cris started to deposit P1,000 monthly in a fund
that pays 6% compounded quarterly. How much
will be in the fund after 15 years?
 WORD PROBLEM #2
A teacher saves P5,000 every 6 months in a
bank that pays 0.25% compounded monthly.
How much will be her savings after 10 years?
 WORD PROBLEM #3
Tracy borrowed an amount of money from
Richard. He agrees to pay the principal plus
interest by paying P38,973.76 each year for 3
years. How much money did he borrow if interest
is 8% compounded quarterly?
 WORD PROBLEM #4
Mrs. Remoto would like to buy a television (TV)
set payable for 6 months starting at the end of
the month. How much is the cost of the TV set if
her monthly payment is P3,000 and interest is
9% compounded semi-annually?
DEFERRED ANNUITY
PREPARED BY: MR. JERRY MAE A. RANES
 DEFERRED ANNUITY
Deferred Annuity - an annuity that does not
begin until a given time interval has passed.

Period of Deferral - time between the purchase

of an annuity and the start of the payments for
the deferred annuity.
 WORD PROBLEM #1
On his 40th birthday, Mr. Ramos decided to buy a
pension plan for himself. This plan will allow him to
claim P10,000 quarterly for 5 years starting 3 months
after his 60th birthday. What one-time payment
should he make on his 40th birthday to pay off this
pension plan, if the interest rate is 8% compounded
quarterly?
 PRESENT VALUE OF A DEFERRED
ANNUITY 𝑷
− 𝑘+𝑚𝑡 −𝑘
𝑚 𝑚
𝑖 𝑖
1− 1+ 1− 1+
𝑚 𝑚
𝑃=𝑅 𝑚
−𝑅 𝑚
𝑖 𝑖
𝑚 𝑚

Where: 𝑅 is the regular payment

𝑖 𝑚 is the nominal rate
𝑚 is the frequency of conversion
𝑡 is the term/time
𝑘 is the number of conversion periods in the deferral
 WORD PROBLEM #1
On his 40th birthday, Mr. Ramos decided to buy a
pension plan for himself. This plan will allow him to
claim P10,000 quarterly for 5 years starting 3 months
after his 60th birthday. What one-time payment
should he make on his 40th birthday to pay off this
pension plan, if the interest rate is 8% compounded
quarterly?
 WORD PROBLEM #2
A credit card company offers a deferred payment
option for the purchase of any appliance. Rose plans to
buy a smart television set with monthly payments of
P4,000 for 2 years. The payments will start at the end
of 3 months. How much is the cash price of the TV set
if the interest rate is 10% compounded monthly?
 WORD PROBLEM #3
Mariel purchased a smart television set through the
credit cooperative of their company. The cooperative
provides an option for a deferred payment. Mariel
decided to pay after 2 months of purchase. Her
monthly payment is computed as P3,800 payable in 12
months. How much is the cash value of the television
set if the interest rate is 12% convertible monthly?