ANNUITIES
Sir Ruel I. Cueto
Manila Science High School
LEARNING OUTCOME (S)
At the end of the lesson, the learner is able to illustrate
simple and general annuities, distinguishes between simple
and general annuities, and find the future and present
values of simple and general annuities.
DEFINITION OF TERMS:
Annuity – a sequence of payments made at equal (fixed) intervals or
periods of time.
Payment interval – the time between successive payments
Annuity Certain: No life contingencies:
Unlike a life annuity, where payments
continue for as long as the individual is alive,
an annuity certain ends after the specified
term, regardless of the individual's status.
Suppose you purchase a life annuity from an insurance
company. The terms of the annuity are as follows:
You pay a lump sum premium of Php200,000.00 to the
insurance company.
In return, you will receive Php1,500.00 per month for as
long as you live.
Derivation of the Formula for Future value
Recall example No. 1:
What if you will find the
present Value of the
annuity?
Derivation of the Formula for Future value
Exercise:
• On his 40th birthday, Mr. Ramos decided to buy a
pension plan for himself. This plan will allow him to
claim Php10 000.00 quarterly for 5 years starting
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.
Exercises:
Find the period of deferral.
1. Monthly payments of Php2000.00 for 5 years that will start 7
months from now.
2. Annual payments of Php8000.00 for 12 years that will start 5 years
from now.
3. Quarterly payments of Php5000.00 for 8 years that will start two
years from now.
Problem Solving:
1. 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 Php4000.00 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?
2. Mr. Ribaya paid Php200 000.00 as a down payment for a car. The
remaining amount is to be settled by paying Php16 200.00 at the end
of each month for 5 years. If interest is 10.50% compounded monthly,
what is the cash price of his car?
3. Paolo borrowed Php100 000.00. 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?
Sir Ruel I. Cueto
Manila Science High School
