SECOND QUARTER

Chapter 7: Annuities
❖ Lesson 30: Deferred Annuity [Page 199-207]

Lesson Topics:
1. Deferred Annuity
2. Present value of a Deferred Annuity
3. Period of deferral of a deferred annuity

PREREQUISITE SKILLS: Knowledge of Exponential

function
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 SECOND QUARTER
Chapter 7: Annuities
➢ Lesson 30: Deferred Annuity

Objective: At the end of this lesson, you

should be able to:
❑ calculate the present value
and period of deferral of a
deferred annuity
3
Angelica, who is celebrating her 17th birthday
today, does not want an extravagance party
for her 18th birthday. Instead, she asks her
parents if she could receive P500 per month
until her 21st birthday. Angelica’s mom
decided to save today so that she can provide
extra allowance every month after Angelica’s
18th birthday. But how much should the
mother save so that she will have P200 every
month for 3 years which is due exactly one
year from now? It is an Example of Deferred Annuity …
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5
(A) Review Definition of terms
❑ Annuity – a sequence of payments
made at equal (fixed) intervals or
periods of time.
❑ Annuity Immediate or Ordinary
annuity - a type of annuity in which
the payments are made at the end of
each period. 6
Present Definitions of terms:
❑ Deferred Annuity-an annuity
that does not begin until a
given time interval has passed.
❑ Period of Deferral - time
between the purchase of an
annuity and the start of the
payments for the deferred
annuity. 7
 ➢Present Value of an Ordinary Annuity

P R R R R R . . . R

0 1 2 3 4 5 . . . n
The Present value (P) of Ordinary Annuity is given by
−𝐧
¬ 𝟏− 𝟏+𝐣
P = Ran
𝐣
Where is the regular payment
j is the interest rate per period
n is the number of payments
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➢ Review Suppose Mr. Gran wants to purchase a cellular phone.
He decided to pay monthly for 1 year starting at the end of the
month. How much is the cost of the cellular phone if his monthly
payment is P2,500 and interest is 9% compounded monthly?
Solution. Given: R = ₱2,500 𝒊 (𝟏𝟐)=0.09 t=1 m=12
Find: P
P 2,500 2,500 . . . R
0 1 2 . . . 12
𝒊 (𝟏𝟐) 𝟎.𝟎𝟗
The interest rate per period is
j = 𝒎 = 𝟏𝟐 = 0.0075
The number of payments is n= mt = 12(1) =12

The Present value of Ordinary Annuity is given by

𝟏− 𝟏+𝟎.𝟎𝟎𝟕𝟓 − 𝟏𝟐
¬
P= Ran =2,500 = 28,587.28
𝟎.𝟎𝟎𝟕𝟓
Thus, the cost of the cellular phone now is P28,587.28
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What is deferred annuity?
Recall previous example. What if Mr.
Gran is considering another cellular
phone that has a different payment
scheme?
The scheme is like this…He has to pay
P2,500 for
fourth . If the interest rate is
also 9% converted monthly, how much is
the cash value of the cellular phone?
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Note that the two payment schemes
have the same number of payments n
and the same interest rate per
period . Their main difference is the
start of the payments. The first
scheme started at the end of the
which makes it an
ordinary annuity. The second scheme
started on a later date. This annuity
is called deferred annuity.
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In this example Mr. Gran pays at the end of
the 4rth month to the end of the 15th month.
This time diagram for this option is given
by:
P=?
2,500 2,500 . . . R
0 1 2 3 4 5 . . . 15

Now, how do we get the present value

of this annuity?
12
 : We first assume payments are also being made
during the period of deferral; in other words, there are
no skipped payments. The associated time diagram is:

P’=?
2,500 2,500 2,500 2,500 2,500 . . . R
0 1 2 3 4 5 . . . 15
From the previous lesson, the present value P’ of
the ordinary annuity is given by
𝟏− 𝟏+𝐣 −𝐧 𝟏− 𝟏+𝟎.𝟎𝟎𝟕𝟓 − 𝟏𝟓
¬
P = Ran = 2,500
𝐣 𝟎.𝟎𝟎𝟕𝟓

P’ =35,342.49 13
 : We now subtract the present
value of the payments made during
the period of deferral. Again, based on
the previous lesson, the present value
of the 3 payments during the period
of deferral is
¬ 𝟏− 𝟏+𝐣 −𝐧
𝟏− 𝟏+𝟎.𝟎𝟎𝟕𝟓 − 𝟑
P*= Ran = 2,500
𝐣 𝟎.𝟎𝟎𝟕𝟓

=7,388.89
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 since the payments in the period of
deferral are artificial payments, we subtract the
present value of these payments. We obtain:

P=P’- = 35,342.49- =27,953.60

Thus, the present value of the cellular
phone is P27,953.60.
❖ Comparing the present value of the two scheme.
Ordinary annuity, the cost of the cellular phone now is
P28,587.28
Deferred annuity, the cost of the cellular phone now is
P27,953.6015
Present Value of an Deferred Annuity
❖ Derive the formula for calculating the present
value of a deferred annuity by generalizing the
procedure from the previous example.
❖ Consider the following time diagram where k
artificial payment of R* are placed in the
period of deferral.

R* R* . . . R* R R ... R

0 1 2 ... k k+1 k+2 . . . k+n

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Present Value of an Deferred Annuity
P
R R ... R
0 1 2 ... k k+1 k+2 . . . k+n
The present value of deferred annuity is given by

𝟏− 𝟏+𝐣 − (𝐤+𝐧) 𝟏− 𝟏+𝒋 −𝐤

P= Rak+n¬ -R¬k =R - R
𝐣 𝐣
Where R is the regular payment
j is the interest rate per period
n is the number of payments
k is the number of conversion periods in the
period of deferral (or number of artificial payments) 17
Example 1. On his 40th birthday, Mr. Ramos decided to
buy a pension plan for himself. This plan will allow him
to claim P10,000 quarterly for 5 years starting 3 months
after his 60th birthday. What one-time payment should
he make on his 40th to pay of this pension plan, if the
interest rate is 8% compounded quarterly?
Solution.
Given: R= ₱10,000 𝒊 (𝟒) = 0.08 m = 4
Find: P The annuity is deferred for 20 years and it will go on for 5
years. The first payment is due three months (one quarter) after his
60th birthday, or at the end of the 81st conversion period. Thus, there
are 80 artificial payments.
𝒊 (𝟒) 𝟎.𝟎𝟖
The interest rate per period is j = 𝒎 = 𝟒 = 0.02
The number of actual payments is n= mt = 4(5) =20
The number of artificial payments: k=mn = 4(20)=80
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Time Diagram:
P=?
10,000 10,000 . . . 10,000
0 1 2 . . . 80 81 82 . . . 100
The present value of deferred annuity can be solved as

𝟏− 𝟏+𝐣 − (𝐤+𝐧) 𝟏− 𝟏+𝒋 − 𝐤

P= Rak+n¬ -R¬k =R - R
𝐣 𝐣
𝟏− 𝟏+𝟎.𝟎𝟐 − 𝟏𝟎𝟎 𝟏− 𝟏+𝟎.𝟎𝟐 − 𝟖𝟎
=10,000 - 10,000
𝟎.𝟎𝟐 𝟎.𝟎𝟐
=33,538.38 therefore, the present value of these
monthly pension is P33,538.38 19
Example 2. 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 payment of P4,000 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?
Solution.
Given: R=4,000 𝒊 (𝟏𝟐)= 0.10 t=2 m=12
Find: P the annuity is deferred for 2 months, and payments will go
on for 2 years. Number of artificial payments.
𝒊 (𝟏𝟐) 𝟎.𝟏𝟎
The interest rate per period isj = 𝟏𝟐 = 𝟏𝟐 = 0.00833
The number of actual payments is n= mt = 12(2) =24
The number of artificial payments: k=2

If you assume that there are payments in the period of deferral,

there would be a total of k+n=2+24=26
20 payments
Time Diagram:
P=?
4,000 4,000 . . . 4,000

0 1 2 3 4 ... 26
The present value of deferred annuity can be solved as

𝟏− 𝟏+𝐣 − (𝐤+𝐧) 𝟏− 𝟏+𝒋 − 𝐤

P= Rak+n¬ -R¬k =R - R
𝐣 𝐣
𝟏− 𝟏+𝟎.𝟎𝟎𝟖𝟑𝟑 − 𝟐𝟔 𝟏− 𝟏+𝟎.𝟎𝟎𝟖𝟑𝟑 − 𝟐
=4,000 - 4,000
𝟎.𝟎𝟎𝟖𝟑𝟑 𝟎.𝟎𝟎𝟖𝟑𝟑

=85,260.53 therefore, the cash price of the TV set is

P85,260.53 21
 ❖ Homework: Deferred Annuities
Time Frame: 10 minute, Note: Use Yellow paper in submitting evaluation.
Evaluation 2. Solve the following problems.
(a) Emma availed of a cash loan that gave her an option
to pay P10,000 monthly for 1 year. The first payment is
due after 6 months. How much is the present value of
the loan if the interest rate is 12% converted monthly?

(b) Adrian purchased a laptop through the credit

cooperative of their company. The cooperative provides
an option for a deferred payment. Adrian decided to pay
after 4 months of purchase. His monthly payment is
computed as P3,500 payable in 12 months. How much is
the cash value of the laptop if the interest rate is 8%
convertible monthly?
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 ❖ Seatwork: Deferred Annuities
Time Frame: 10 minute, Note: Use Yellow paper in submitting evaluation.

(c) Mr. and Mrs. Mercado decided to sell their house and to
deposit the fund in a bank. After computing the interest, they
found out that they may withdraw P350,000 yearly for 4 years
starting at the end of 7 years when their child will be in college.
How much is the fund deposited if the interest rate is 3%
converted annually?

(d) A group of employees decided to invest a portion of their

bonus. After 3 months from today, they want to withdraw
from this fund P5,000 monthly for 12 months to fund their
gathering that they decide to do every month. How much is
the total deposit now if the interest rate is 5% converted
monthly?

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 ❖ Performance Task No. 2 (2nd Quarter):
Time Frame: until October 2020
Note: Individual Activity (if you submitted similar report, the score will
be divided for the total number of similar report) to be submitted in
hard copy.
Find situations involving annuity in your community. For
example:
➢ Go to appliance store, and ask how much a certain
appliance costs if it is (a) paid in full, or (b) paid by
installment.
➢ If you know someone borrowing from a
moneylender, you can ask how much you will be
charged if you want to loan P1,000, payable in 1 year.
[one common non-formal lending practice in the
Philippines is called five-six]
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 ❖ Performance Task No. 2 (2nd Quarter):
Time Frame: until October 2017
Note: Individual Activity (if you submitted similar report, the score will
be divided for the total number of similar report) to be submitted thru
an email; alfred_labadorjr@yahoo.com
For the situation you choose, determine the interest rate
for the period and the annual interest rate.
For example, if an appliance that costs P15,000 can be
paid in 8 monthly payments of P2,000, then, the formula
𝟏− 𝟏+𝐉 −𝟖
15000= 2000 𝐣
must be satisfied. Experiment with different values for j
to determine the interest rate for the period, and the
annual interest rate.

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 Deferred annuity is
better than ordinary annuity
due since the amount of the
deferred annuity is lower than
the amount of ordinary
annuity due. However, in
terms of a loan, it is better to
have an ordinary annuity due.
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❑ Deferred annuity is an annuity in which
the first payment interval is not made at
the beginning nor end of the payment
interval, but at a later date.
❑ Deferral period is the length of time
from the present to the beginning of
the first payment interval.
❑ Present value is the amount of money
to be invested or to be paid today.
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