Annuity

ANNUITY
Group 3
ANNUITY
A sequence of payments made at
equal (fixed) intervals or periods of
time
Lesson outline:
01 Definition of
Future Value of Simple annuity.
02 terms
03 Present value of a simple
04 annuity
Periodic Payment of a simple
annuity
DEFINITION OF TERMS
Term of an annuity ‘’t’’ - time between the first payment
and last payment interval
Regular or Periodic payment ‘’R’’ – the amount of each
payment
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.
DEFINITION OF TERMS
Present value of an annuity ‘’P’’ - sum of PRESENT
values of all the payments to be made during the entire
term of the annuity
ACCORDING TO PAYMENTS INTERVAL
AND INTEREST PERIOD
• Simple Annuity - an annuity where the payment
interval is the same as the interest period.
• General Annuity - an annuity where the payment

interval is not the same as the interest period.
FUTURE VALUE OF PRESENT VALUE OF
SIMPLE ORDINARY SIMPLE ORDINARY
ANNUITY (F) ANNUITY (F)
FORMULA
F=R P=R
SIMPLE ANNUITY
Ordinary Annuity
A type of annuity in which
the payments are made at
the end of each payment
interval.
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:
periodic payment R = P3,000
term (t) = 6 months
interest rate per month i(12) = 0.09
number of conversions per year m = 12
n = mt = 12(𝟏/𝟐) = 6
Interest rate per period j = = = 0.0075
SOLUTION:
SOLUTION:
(2) Add all the future values obtained from the cash
flow.
3000= 3000
3000 (1 + 0.0075)= 3022.50
3000 (1 + 0.0075)2= 3045.17
3000 (1 + 0.0075)3= 3068.01
3000 (1 + 0.0075)4= 3091.02
3000 (1 + 0.0075)5= 3114.20
F =18340.9
Thus, the amount of this annuity is P18,340.89

FUTURE VALUE OF A SIMPLE
ANNUITY
Sum of future values of all the payments to be
made during the entire term of the annuity. (F)
F=R
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 0.250% compounded monthly, how much will her
money be at the end of 6 years?
Given:
periodic payment R = P200
term (t) = 6 years
interest rate per month i(12) =0.0025
number of conversions per year m = 12
Interest rate per period j = = = 0.0002083333
n = mt = 12(6) = 72
SOLUTION:
F=R
Substitute the value of each variable:

F=R F = (200)
F = (200) F = (200)(72.53509641)
F = (200) F = 14507.02
F = (200)
Thus, the amount the future value of this
annuity is P14,507.02
PRESENT VALUE OF A SIMPLE
ANNUITY
Sum of present values of all the payments to be
made during the entire term of the annuity. (P)
P=R
EXAMPLE 3: Mr. Gonzales paid P2,000 monthly for 5 years
with interest rate of 12% compounded monthly.
Given:
R = P2000
t = 5 years
i(12) =0.12
m = 12
j = = = 0.01
n = mt = 12(5) = 60
SOLUTION:
P=R

P = (2000) P = (2000) (44.95503841)
P = (2000) P = 89910.08
P = (2000)
P = (2000) Thus, the amount the present value of this
annuity is P89,910.08
PRESENT VALUE OF A SIMPLE
ANNUITY
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 4: 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:
Down payment = P200,000
R = P16,200
t = 5 years
i(12) =0.105
m = 12
j = = = 0.00875
n = mt = 12(5) = 60
SOLUTION:
P=R

P = (16200) P = (16200) (46,52482715)
P = (16200) P = 753702. 20
P = (16200)
P = (16200) TO FIND THE CASH PRICE OF THE CAR:
Cash Value = Down payment + Present
value
Cash Value = 200,000 + 753,702.20
Cash Value = P953, 702,20
The cash price of the car is P953,702.20
PERIODIC PAYMENT R OF A
SIMPLE ANNUITY
Periodic payment
R can also be solved
using the formula for
amount future value F
or present value P of
annuity
EXAMPLE 5: 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 = P100,000
t = 3 years
i(1) =0.08
m=1
j = = = 0.08
n = mt = 1(3) = 3
SOLUTION:
R = P/

R = 100000/ P=
R = 100000/ P = 30,803.35
P = 100000/
P = 100000/ The periodic payment of this simple annuity is
30,803.35
General Annuity
Lesson outline:
01 Future Value of a Simple annuity.
02 Present value of a General annuity
03 Fair market value of a cash flow stream
that includes and annuity
DEFINITION OF TERMS
General Annuity – an annuity where the length of the
payment interval is not the same as the length of the
interest compounding period.
General Ordinary Annuity – a general annuity in which

the periodic payment is made at the end of the payment
interval
DEFINITION OF TERMS
Examples of General Annuity:
1. Monthly installment payment of a car, lot, or house with
an interest rate that is compounded annually.
2. Paying a debt semi-annually when the interest is

compounded monthly.
GENERAL ANNUITY
GENERAL ANNUITY
NOTE: The formulas for F and P are same as those in
simple annuity. The extra step occurs in finding j (interest
rate per period) must be converted to an equivalent rate
per payment interval.
EXAMPLE 4: Cris 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 = P1000
t = 15 years
m1 = 12
m2 = 4
i(4) =0.06
n = mt = 12(15) = 180
SOLUTION:
PRESENT VALUE OF A GENERAL ANNUITY
EXAMPLE 5: Ken borrowed an amount of money from Kat.
He agrees to pay the principal plus interest by paying P38,973
each year for 3 years. How much money did he borrow if interest
is 8% compounded quarterly?
Given:
R = P 38, 973
i(4) = 0.08
t=3
m1 = 12
m2= 4
n = (m1 )(t) = (12)(3) = 36
SOLUTION:
(1) Convert 8% compounded (2) Apply the formula in finding the
quarterly to is equivalent present value of an ordinary annuity using
interest rate for each payment the computed equivalent rate
interval. j = 0.082432
FAIR MARKET VALUE OF A CASH FLOW STREAM
THAT INCLUDES AND ANNUITY
CASH FLOW —is a term that refers to payments received (cash
inflows) or payments or deposits made (cash outflows). Cash inflows
can be represented by positive numbers and cash outflows can be
represented by negative numbers.
FAIR MARKET VALUE - of a cash flow (payment stream) on a

particular date refers to a single amount that is equivalent to the value
of the payment stream at that date. This particular date is called the
focal date.
EXAMPLE 6: Mr. Ribaya received two offers on a lot that he
wants to sell. Mr.Ocampo has offered P50,000 and a P1 million
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
values of the two offers if money can earn 5% compounded
annually. Which offer has a higher market value?
Given:
Mr. Ocampo’s offer Mr. Cruz’s offer
P50,000 down payment P50,000 down payment
P1,000,000 after 5 years P40,000 every quarter
for 5 year

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ANNUITY

• General Annuity - an annuity where the payment

Thus, the amount of this annuity is P18,340.89

Substitute the value of each variable:

Substitute the value of each variable:

Substitute the value of each variable:

Substitute the value of each variable:

General Ordinary Annuity – a general annuity in which

2. Paying a debt semi-annually when the interest is

FAIR MARKET VALUE - of a cash flow (payment stream) on a

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