MAT112 BUSINESS MATHEMATICS

CHAPTER FOUR: ANNUITY

Learning Outcomes
By the end of this chapter, student should be able to:
1. Explain the term ‘ordinary annuity certain’.
2. Find the future value and present value of annuity.
3. Solve for annuity payment (R), number of payments (n), the interest rate (i).
4. Identify the problems where the present value and the future value of the annuity formula
can be appropriately applied.

Introduction
Financing the payment of pensions, life insurance premiums, installment payment plans for
purchasing cars, appliances and houses, monthly deposits of money in bank, installment loan
payments, are just a few examples of annuities. From the above examples, we can see that
the subject of annuities affects all walks of life.

Overview
✓ An annuity is a sequence or series of periodic payments, usually equal, made at equal
intervals of time.
✓ The payments are computed by the compound interest method.
✓ The period of time between two successive payment dates is called payment interval, such
as annually, semiannually or quarterly.
✓ The time from the beginning of the first payment interval to the end of the last payment
interval is called term of an annuity.

✓ It is important to note that the intervals at which deposits are made must be the same as
the intervals at which interest is compounded.
✓ In this module we will only discussed ordinary annuity certain.
 Future Value of an Annuity
Future value of an annuity is the sum of all future values of the periodic payments.

The formula for future value of annuity is:

 (1 + i )n − 1
S = R 
 i 

where,
R : the periodic payment of the annuity
S : Future value of annuity / Accumulated amount
k
i : Interest rate per payment (conversion); i =
m
n : the total number of payment (term of annuity); n = mt

The formula for interest (I) is:

I = S − nR

Remark:
✓ The amount S is just immediately after a payment has been made.
✓ The formula for the future value of annuity is usually used in solving problems that discuss
about savings and investment.
QUESTION 1
Find the amount of RM500 which was deposited at the end of every month for 6 months in an
account that offered 5% interest rate compounded monthly.

Solution:
 (1 + i )n − 1
S = R 
 i 
 12
6


 1 + 0.05 
− 1
12

  
12 
S = RM500   = RM 3031.42
0.05
 
 12 
 

QUESTION 2
A student deposit RM 50 in a bank at the end of each month for three years. If the money
earns interest at 8% compounded monthly, how much does he have in his account at the end
of three years?
QUESTION 3
To save for his daughter’s university education fund, En. Ahmad decides to put RM 125 aside
every three months in a financial institution paying 10% compounded quarterly. If he begins
this savings program when his daughter is 2 years old,
a) How much will he save by the time his daughter is 18 years old?
b) How much interest did En. Ahmad gain?

QUESTION 4
Find the amount of an annuity if a deposit of RM 1,000 per year is made for 35 years at 10%
compounded annually. How much interest is earned?
QUESTION 5
Salmah deposited RM 200 at the end of each month into an account earning 5.4% interest
compounded monthly for 15 years.
a) How much will be in the account?
b) How much of the future value will be from deposits?
c) How much of the future value will be from interest?

QUESTION 6
A couple deposits RM 500 every three months into a saving account that pays interest at 11%
compounded quarterly. They made their first deposit on March 30, 2010. How mush money
will they have in the account just after they make their deposit on September 30, 2014?
 Present Value of an Annuity

Present value of an annuity is the sum of all present values of the periodic payments.

The present value of annuity formula relies on the concept of time value of money, in that
one ringgit present day is worth more than that same ringgit at a future date.
The formula for present value of annuity is:

1 − (1 + i )− n 
A = R 
 i 

where,
R : the periodic payment of the annuity
A : Present value of annuity
k
i : Interest rate per payment (conversion); i =
m
n : the total number of payment (term of annuity); n = mt

The formula for interest (I) is:

I = nR − A

Remark:
✓ The value A is the value of an annuity one period before the first payment.
✓ The formula for present value of an annuity is usually used in solving problems on loan,
installment purchases and investment to make periodic withdrawals.
QUESTION 7
Find the present value of RM300 payable at the end of every month at 6% compounded
monthly for 6 months. Hence, find the interest earned.

1 − (1 + i )− n 
A = R 
 i 
 −12
6


1 −  1 + 0.06  12

   
12 
A = RM300   = RM1768.92
0.06
 
 12 
 

QUESTION 9
A college student would like to borrow money from a bank that charges 6.5% compounded
quarterly for his education. If he agrees to pay RM 200 periodically for ten years, how much
money should he receive from the bank at the time of borrowing?
QUESTION 10
A man agrees to pays RM 900 per month for 84 months to pay off a car loan. If the interest
of 9% compounded monthly, how much was the price of the car? How much interest was
paid?

QUESTION 11
Harry borrowed RM50000 from a financial institution which charges 5% compounded monthly.
He paid the loan by making 48 monthly payments. Find his monthly payments.

QUESTION 12
Rahimah made equal payments of RM2106.71 every 2 month for 8 years at 6% interest
compounded every 2 months. Find the amount of the loan taken by Rahimah.
 EXERCISE

QUESTION 1
RM800 is deposited every six months in an account for 13 years at 5.4% compounded semi-
annually. Find the amount in the account at the end of 5 years and 6 months.

QUESTION 2
Ameena borrowed a certain sum of money from a financial institution that charged 4.8%
compounded monthly. She must pay RM725 every month for 9 years. Calculate the initial
value of the loan.

QUESTION 3
Puan Mariani needs to pay RM268 every month for a loan of RM10,554 from XYZ Bank at
18% compounded monthly.

a) Calculate the number of equal payments required.

b) If Puan Mariani failed to pay the first five monthly payments, how much should she pay on
the sixth payment to settle the outstanding arrears?

QUESTION 4
Puan Nurhaliza bought an apartment by making a down payment of RM33,500 and had to
settle monthly payments of RM1,467.50 for 336 months. If the interest charged was 3.85%
compounded monthly.

a) Calculate the cash price of the apartment.

b) If Puan Nurhaliza failed to pay the first six monthly payments, how much should she pays
on the seventh payment to settle the outstanding arrears?

QUESTION 5
Rani invests RM X every six months into a fund that pays 12% compounded semi annually.
Find the value of X if the fund was accumulated to RM5,745.66 in 4 years and 6 months.

QUESTION 6
Ameena borrowed a certain sum of money from a financial institution that charged 4.5%
compounded monthly. She has to pay RM725 every month for 9 years. Calculate the initial
value of the loan.

QUESTION 7
Nadhirah needs to pay RM168.28 every month for a loan of RM7,000 from XYZ Bank at 7.2%
compounded monthly.

a) Calculate the number of equal payments required.

b) If Nadhirah failed to pay the first five monthly payments, how much should she pay on the
sixth instalment to settle the outstanding arrears?

QUESTION 8
Suzana deposited RMX every month into an account that paid interest 5.5% compounded
monthly. She wanted to have RM50,000 in 5 years time for her kitchen renovation. How much
the equal monthly payment that she should make?
QUESTION 9
Adlina Rose took a housing loan that charged 6.25% compounded monthly to buy a new
bungalow. She paid the down payment of RM115,000 and needs to repay the loan in 25 years’
time with monthly payment RM5,500. Determine the amount borrowed.

QUESTION 10
Nurul borrows RM29,635 for 5 years at 15% compounded monthly. Calculate Nurul’s monthly
payment.

QUESTION 11
Mr. Aryan bought a new car. He made a down payment of RM11,000 and the balance was
borrowed at 12% compounded monthly. He must pay RM1,500 every month for 7 years to
settle the loan.
a) Calculate the cash price of the car.
b) Immediately after paying the first 31 monthly payments, he intended to settle the loan.
Calculate the total amount paid to discharge the loan.

QUESTION 12
Rafael invested RM643 every three months for 8 years. He was offered 4.2% compounded
quarterly. Determine the accumulated amount at the end of the investment period.

QUESTION 13
Herman bought a terrace house at RM650,000. He paid a 10% down payment and the balance
was financed by taking a loan for 25 years. The interest charged was 5% compounded
monthly.
a) Find the monthly payment and interest charged.
b) If the loan is settled 5 years earlier than the actual period through a single payment, find
this single payment.

QUESTION 14
Jeremiah invested RM100 every month into his Paradise Mutual Fund account for 8 years at
an interest rate of 6% compounded monthly. Find the future value at the end of the investment
period.

QUESTION 15
A property costing RM440,000 cash is purchased by making a 14% down payment. The
balance is to be settled by making 140 equal monthly payments. The interest charged is 6.4%
compounded monthly.
a) Calculate the monthly payment.
b) Find the total interest charged.
c) If the buyer fails to pay for the first 14 monthly payments, how much should the buyer pay
on the 15th payment to settle all the outstanding arrears?

QUESTION 16
Zii Jia took a loan and consequently made equal payments of RM415 every month for seven
years at 7.4% interest compounded monthly. If he decided to pay off the loan immediately
after making his 52nd payment, calculate the amount of loan to be settled.
QUESTION 17
Leah deposited RM350 monthly into an investment scheme that offers interest rate of 3.8%
compounded monthly. After 5 years of the investment, she withdrew all the money to pay the
down payment of the house she bought. The price of the house is RM200,000 and the balance
is paid by making 240 monthly payments. The interest rate charged is 4% compounded
monthly. Calculate
a) the total interest earned from the investment scheme.
b) the monthly payment to be paid for the house.

QUESTION 18
Cheong invested RM700 every month into an investment scheme for 9 years that pays an
interest rate of 5% compounded monthly. Find the future value at the end of the investment
period.

QUESTION 19
Qiang invest RM 255 every month in an account that pays 6.75% interest compounded
monthly. Find the amount in the account after 60 months.

QUESTION 20
Fizi takes a loan that charged interest at 6.6% compounded monthly. He repays the loan in 8
years with monthly payment of RM677. Immediately after paying the 66th payment, he decides
to settle the balance of the loan. Find the balance to be paid.

QUESTION 21
RM300 was invested every month for 3 years in an account that paid 9% interest rate
compounded monthly. After 3 years, no more deposit was made. Find, the accumulated
amount obtained at end of seven years, and total interest earned.

QUESTION 22
Analia invested RM500 every month for five years in an investment scheme. She was offered
6% compounded monthly for the first two years and 8% compounded monthly for the next
three years. Find, the accumulated amount obtained at end of five years, and total interest
earned.