DEFERRED ANNUITY
Deferred Annuity
• A deferred annuity can be a long-term
investment in which you invest a sum
of money, then receive payments
several years down the line after the
initial sum has accrued interest.
Definition of Terms
• Annuity – It is a sequence of equal
payments (or deposits) made at a regular
interval of time.
• Annuity Immediate or Ordinary Annuity – It
is a type of annuity in which the payments
are made at the end of every period.
Definition of Terms
• Present value (P) of an annuity – with
regular payments (or deposits) equal
to (R) at interest rate (r)
Definition of Terms
• Deferred Annuity – is an annuity
that does not begin until a given
time interval has passed.
- Investors can delay payments from a
deffered annuity indefinitely.
Definition of Terms
• Period of Deferral – is a time
between the purchase of an annuity
and the start of the payments for the
deferred annuity.
Deferred annuities are
series of payments, as they
have already learned in the
past lessons on annuities
but, will start on a later
date.
Some examples of this type
of annuity in real life:
1.If you will buy appliance, some big stores or
appliances center offers deferred payment.
Some examples of this type
of annuity in real life:
2. A credit card company is offering its client
to purchase today but to start paying monthly
with their choice of the term after 3 months.
3. A real state agent is urging a house and lot
buyer to purchase now and start paying after 3
years when the housing unit is ready for
occupancy.
Some examples of this type
of annuity in real life:
4. A worker who has gained extra
income now and wants to save his
money so that he can withdraw
his money monthly starting on the
day of his retirement from work.
To determine the present value of
a deferred annuity, find the
present value of all k + n
payments (including the artificial
payments), then subtract the
present value of all artificial
payments.
Example
Find the present value of 10 semi-
annual payments of ₱2,000.00 each if
the first payment is due at the end of
3 years an money is worth 8%
compounded semi-annually.
Solution
Consider an 8-year timeline for the illustration.
To visualize and find d, we have
Given
R = ₱2,000.00 t=5
r = 8% m=2
Find: P
Number of artificial payments: k = 5
Number of actual payments: n = mt = (2)(5) =
10
Interest rate per period j = = = 0.04
FORMULA
P=R-
P=R-
P = 2000
P = 2000
P = 2000
P = 2000
P = 2000
P = 2000
P = 2000
P = ₱13,333.13
Example
Find the present value of a deferred
annuity of ₱1,500.00 every 3 months
for 8 years that is deferred 3 years if
money is worth 6% converted or
compounded quarterly.
Given
R = ₱1,500.00 t = 8 years
Find: P
r = 6% m=4
Number of artificial payments: k = mt = (4)(3) = 12
Number of actual payments: n = mt = (4)(8)= 32
Interest rate per period: j = = = 0.015
If you assume that there are payments in
the period of deferral, there would be a
total of k+n = 12 + 32 = 44 payments
Formula: P = R -
P=R-
P = 1,500
P = 1,500
P = 1,500
P = 1,500
P = 1,500
P = 31,699.68
Example
Find the period of deferral in each of
the following deferral annuity problem
(one way to find the period of deferral
is to count the number of artificial
payment (k)
a.Monthly payment of P12,000.00 for 9
years that will start 6 months from now.
Consider the time diagram
Therefore, there are 5 skip payments
Answer: 5 months or 5 periods
b. Semi-annual payments of P7,500.00 for
15 years that will start 4 years from now.
Skip payment
Answer: 7 periods or 7 semi – annual
intervals
