ANNUITIES

ANNUITY – a sequence of payments made at equal (fixed)

intervals or periods of time.
ANNUITIES
Simple Annuity – an annuity where General Annuity – an annuity where
According to payment the payment interval is the same as the payment interval is NOT the
interval and interest the interest period. same as the interest period.
period

Ordinary Annuity – a type of annuity Annuity Due – a type of annuity in

According to time of in which the payments are made at which the payments are made at
payment the end of each payment interval. beginning of each payment interval.

Annuity Certain – an annuity in which Contingent Annuity – an annuity in

According to duration payments begin and end at definite which the payments extend over an
times. indefinite length of time.
DEFINITION OF TERMS:
o Term of an annuity, t – time between the first payment interval and
last payment interval.
o Regular or Periodic payment, R – the amount of each payment.
o Amount (Future Value) of an annuity, F – sum of future values of
all the payments to be made during the entire term of the annuity.
o Present value of annuity, P – sum of present values of all the
payments to be made during the entire term of the annuity.
EXAMPLE 1: Determine if the given situations represent simple
annuity or general annuity.

1. Payments are made at the end of each month for a loan that charges
1.05% interest compounded quarterly.
Answer: GENERAL ANNUITY

2. A deposit of Php. 5,500.00 was made at the end of every three

months to an account that earns 5.6% interest compounded quarterly.
Answer: SIMPLE ANNUITY
EXAMPLE 2: Determine whether the situation describes an
ordinary annuity or an annuity due.

1. Jun’s monthly mortgage payment is Php. 35,148.05 at the end of

each month.
Answer: ORDINARY ANNUITY

2. The rent of apartment is Php. 7,000.00 and due at the beginning of

each month.
Answer: ANNUITY DUE
 FORMULAS OF SIMPLE ORDINARY
ANNUITY
FUTURE VALUE OF SIMPLE ORDINARY ANNUITY
𝑛
( 1+ 𝑗 ) − 1
𝐹 =𝑅
𝑗
Where: Note:
 R is the regular payment 𝑟
𝑗= 𝑛=𝑚𝑡
 j is the interest rate per period 𝑚
 n is the number of payments
EXAMPLE 1: Suppose Mrs. Remoto 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 her savings after 6 months?
GIVEN: R = 3,000 or 0.09 t = 6 months or 0.5 year m = 12
𝑟 0.09
SOLUTION: 𝑗= = =0.0075 𝑛=𝑚𝑡=( 12 ) ( 0.5 ) =6
𝑚 12
1.04585 −1
𝑛
( 1+ 𝑗 ) − 1 𝐹 =3,000
𝐹 =𝑅 0.0075
𝑗 0.04585
𝐹 =3,000
( 1+0.0075 )6 −1 0.0075
𝐹 =3,000
0.0075 𝐹 =3,000 ( 6.11333 )
( 1.0075 )6 −1 𝐹 =18 , 339.99
𝐹 =3,000
0.0075
Thus, the amount of this annuity is P18,339.99
EXAMPLE 2: In order to save for her high school graduation, Marie decided to
save P200 at the end of each month. If the bank pays 0.25% compounded monthly,
how much will her money be at the end of 6 years?
GIVEN: R = 200 or 0.0025 t = 6 years m = 12
𝑚
𝑖 0.0025 𝑛=𝑚𝑡=( 12 ) ( 6 ) =72
SOLUTION: 𝑗= =
𝑚 12
=0.00021
1.01523 −1
𝑛
( 1+ 𝑗 ) − 1 𝐹 =200
𝐹 =𝑅 0.00021
𝑗 0.01523
𝐹 =200
( 1+0.00021 )72 − 1 0.00021
𝐹 =200
0.00021 𝐹 =200 ( 72.52381 )
( 1.00021 )72 −1 𝐹 =14,504.76
𝐹 =200
0.00021 Hence, Marie will be able to save P14,504.76 for her graduation.
 FORMULAS OF SIMPLE ORDINARY
ANNUITY
PRESENT VALUE OF SIMPLE ORDINARY ANNUITY
−𝑛
1 − ( 1+ 𝑗 )
𝑃= 𝑅
𝑗
Where: Note:
 R is the regular payment 𝑟
𝑗= 𝑛=𝑚𝑡
 j is the interest rate per period 𝑚
 n is the number of payments
EXAMPLE 1: Rose works very hard because she wants to have enough money in her
retirement account when she reaches the age 60. she wants to withdraw P36,000 every 3
months for 20 years starting 3 months after she retires. How much Rose deposit at retirement at
12% per year compounded quarterly for the annuity.
GIVEN: R = 36,000 or 0.12 t = 20 years m=4
𝑟 0.12
SOLUTION: 𝑗= = =0.03 𝑛=𝑚𝑡=( 4 ) ( 20 ) =80
𝑚 4
1 −0.09398
P 𝑃=36,000
0.03
0.90602
−80 𝑃=36,000
1 − ( 1+ 0.03 ) 0.03
𝑃 = 36,000
0.03 𝑃=36,000 ( 30.20067 )
− 80
1 − ( 1.03 )
𝑃= 36,000 𝑷 =𝟏 , 𝟎𝟖𝟕, 𝟐𝟐𝟒 .𝟏𝟐
0.03
Note:
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.
EXAMPLE 2: Mr. Ribaya 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?
GIVEN: R = 16,200 or 0.105 t = 5 years m = 12
Down Payment: P200,000
𝑟 0.105
SOLUTION: 𝑗= = =0.00875 𝑛=𝑚𝑡=( 12 ) ( 5 )=60
𝑚 12
1 −0.59291
P 𝑃=16,200
0.00875
0.40709
−60 𝑃=16,200
1 − ( 1+0.00875 ) 0.00875
𝑃 = 16,200
0.00875 𝑃=16,200 ( 46.52457 )
− 60
1 − ( 1.00875 )
𝑃=16,200 𝑷 =𝟕𝟓𝟑 ,𝟔𝟗𝟖 .𝟎𝟑
0.00875
To find the cash value or cash price:

Cash value=Down payment + present value

Cash value=200,000 +753,698.03
Cash value=953,698.03
The cash price of the car is P953,698.03
 FORMULAS OF SIMPLE ORDINARY
ANNUITY
PERIODIC PAYMENT R OF AN ANNUITY
𝐹 𝑃
𝑅= 𝑅= −𝑛
𝑛
( 1+ 𝑗 ) − 1 1 − ( 1+ 𝑗 )
𝑗 𝑗
Where:
 R is the regular payment
 P is the present value of an annuity
 F is the future value of an annuity
 j is the interest rate per period
 n is the number of payments
EXAMPLE 1: Paolo 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?
GIVEN: P = 100,000 or 0.08 m=1 t = 3 years
𝑟 0.08
SOLUTION: 𝑗= 𝑚 = 1 =0.08
𝑃 100,000
𝑅= 𝑅=
1 − ( 1+ 𝑗 )
−𝑛 1 −0.79383
𝑗 0.08
100,000 100,000
𝑅= 𝑅=
1 − ( 1+ 0.08 )
−3 0.20617
0.08 0.08
100,000 100,000
𝑅= −3 𝑅=
1 − ( 1.08 ) 2.57713 Thus, the man should pay P38,802.85
0.08 every year for 3 years.

𝑹=𝟑𝟖 , 𝟖𝟎𝟐. 𝟖𝟓
EXAMPLE 2: Mr. Ribaya would like to save P500,000 for his son’s college education. How
much should he deposit in a savings account every 6 months for 12 years if interest is at 1%
compounded semi-annually?
GIVEN: F = 500,000 or 0.01 m=2 t = 12 years
𝑟 0.01
SOLUTION: 𝑗= 𝑚 = 2 =0.005
𝐹 500,000
𝑅= 𝑅=
( 1+ 𝑗 )𝑛 − 1 1.12716 − 1
𝑗 0.005
500,000 500,000
𝑅= 𝑅=
( 1+ 0.005 )24 − 1 0.12716
0.005 0.005
500,000 500,000
𝑅= 𝑅=
( 1.005 )24 − 1 25.432
0.005
𝑹=𝟏𝟗 , 𝟔𝟔𝟎. 𝟐𝟕