Gen Math Q2 - Week 4 - General Annuity

GENERAL ANNUITIES
AND
EQUIVALENT RATES
Q2 – WEEK 4
General Annuity
General Ordinary
General Annuity is a type
Annuity is a general
of annuity in which the
annuity in which the
payment period is not the
periodic payment is made
same as the interval period
at the end of the payment
(conversion period)
interval
GENERAL ORDINARY ANNUITY
Examples of General annuity:

1. Monthly installment payment of a car loan with an interest rate that is
compounded annually.
2. Paying a debt semi-annually when the interest is compounded monthly.
Definition of Terms
• Equivalent rates – two annual rates with different

conversion periods that will earn the same
compound amount at the end of a given number of
years
• Nominal rate – annual interest rate () may be
compounded more than once a year)
• Effective rate – the rate compounded annually that
will give the same compound amount as a given
nominal rate, denoted by
EQUIVALENT INTEREST RATE and EFFECTIVE RATE
1. What effective rate is equivalent to 10% compounded quarterly?
Given:
Find: effective rate
Solution: Since the equivalent rates yield the same maturity value, then

Hence, the effective rate equivalent to 10%

compounded quarterly is 10.38%
Practice exercises
Compute for the rates equivalent to the given nominal rates

Given Interest Rate Equivalent Interest Rate
1. 12.5% compounded annually _________ compounded monthly
2. 9% compounded semi-annually _________ compounded quarterly
3. 11% compounded quarterly _________ compounded annually

GENERAL
ORDINARY ANNUITY
Example: Ben started to deposit P1,000 monthly in a fund that pays 6% compounded
quarterly. How much will be in the fund after 15 years?
Given: R = 1,000; n = 12(15) = 180 payments; i(4) = 0.06; m = 4

Find: F
The Cash Flow for this problem is shown in the diagram below.
Example: Ben started to deposit P1,000 monthly in a fund that pays 6% compounded quarterly. How much
will be in the fund after 15 years?
Given: R = 1,000; i(4) = 0.06; m = 4

n = 12(15) = 180 payments
Find: F
Solution:
(1) Convert 6% compounded quarterly
to its equivalent interest rate for
monthly payment interval.
(2) Apply the formula in finding the
future value of an ordinary annuity
using the computed equivalent rate.
𝑖 12
=0.004975206= 𝑗
12
Example: A teacher saves ₱5,000 every 6 months in a bank that pays 0.25% compounded monthly. How
much will be her savings after 10 years?
Given: R = ₱5,000; i(12) = 0.0025;

m=12 ; n = 2(10) = 20 payments;
Find: F
Solution:
(1) Convert 0.25% compounded
monthly to its equivalent interest rate
for each semi-annual payment interval.
future value of an ordinary annuity
using the computed equivalent rate.
Example: Ken borrowed an amount of money from Kat. 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 the interest is 8% compounded quarterly?
GIVEN: R = 38,973.76, i(4) = 0.08, m =

4, n = 3 payments
Find: Present Value, P
Solution:
(1) Convert 8% compounded quarterly
to its equivalent interest rate for each
payment interval.
present value of an ordinary annuity
using the computed equivalent rate j =
0.082432.
Formula for General Ordinary Annuity
PRESENT VALUE OF GENERAL
ANNUITY

FUTURE VALUE OF GENERAL

ANNUITY
Example: Ben started to deposit P1,000 monthly in a fund that pays 6% compounded quarterly. How much
will be in the fund after 15 years?
Given: R = 1,000; i(4) = 0.06; m = 4 ; n = 12(15) = 180 payments

Find: F

Solution:

Example: A teacher saves ₱5,000 every 6 months in a bank that pays 0.25% compounded monthly. How
much will be her savings after 10 years?
Given: R = ₱5,000; i(12) = 0.0025; m = 12; j = ; n = 2(10) = 20 payments; =
Find: Future value, F

Solution:
=
CASH FLOW and
FAIR MARKET
VALUE
Cash Flow and Fair Market Value
A cash flow is a term that refers to The fair market value or

payments received (cash inflows) or economic value of a cash flow
payments or deposits made (cash (payment stream) on a particular
outflows). Cash inflows can be date refers to a single amount that is
represented by positive numbers equivalent to the value of the
and cash outflows can be payment stream at that date. This
represented by negative numbers. date is called focal date.
Mr. Ramos received two offers on a lot that he wants to sell. Mr. Ocampo has offered P50,000 and a P1million lump
sum payment 5 years from now. Mr. Cruz has offered P50,000 plus P40,000 every quarter for five years. Compare the
fair market value of the two offers if money can earn 5% compounded annually. Which offer has a higher market
value?
Mr. Ocampo’s Offer Mr. Cruz’s Offer

P50,000 down payment P1,000,000 P50,000 down payment P40,000 every quarter
after 5 yrs. for 5 yrs.
Find the market value of each offer.
SOLUTION: We illustrate the cash flows of the two offer using time diagram
833,526.20
−755,572.70=𝑃 77,953.50
END OF PRESENTATION
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GENERAL ANNUITIES

Examples of General annuity:

• Equivalent rates – two annual rates with different

Hence, the effective rate equivalent to 10%

Compute for the rates equivalent to the given nominal rates

2. 9% compounded semi-annually _________ compounded quarterly

3. 11% compounded quarterly _________ compounded annually

Given: R = 1,000; n = 12(15) = 180 payments; i(4) = 0.06; m = 4

Given: R = 1,000; i(4) = 0.06; m = 4

Given: R = ₱5,000; i(12) = 0.0025;

GIVEN: R = 38,973.76, i(4) = 0.08, m =

FUTURE VALUE OF GENERAL

Given: R = 1,000; i(4) = 0.06; m = 4 ; n = 12(15) = 180 payments

Given: R = ₱5,000; i(12) = 0.0025; m = 12; j = ; n = 2(10) = 20 payments; =

Find: Future value, F

A cash flow is a term that refers to The fair market value or

Mr. Ocampo’s Offer Mr. Cruz’s Offer

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