ANNUITIES

Definition of terms
• Annuity – a sequence of payments made at equal (fixed) intervals or
periods of time.
• Payment interval – the time between successive payment
• Term of annuity, t – time between the first payment interval and last
payment interval.
• Regular or Periodic payment, R – the amount of each payment
• Amount (Future Value) of annuity, F – sum of future values of all the
payments to be made during the entire term of annuity
• Present value of annuity, P – sum of present values of all the
payments to be made during the entire term of annuity
 Definition of terms
According to payment interval and
interest period
According to time of payment
Annuities
Simple Annuity
An annuity where the payment
interval is the same as the interest
period
Ordinary Annuity
(or annuity immediate)
A type of annuity in which the
payments are made at the end of
each payment interval
General Annuity
An annuity where the payment
interval is not the same as the
interest period
Annuity Due
A type of annuity in which the
payments are made at the
beginning of each payment interval
Amount (Future Value) of an Ordinary
Annuity (Annuity Immediate)

𝑛
(1 + 𝑗) −1
𝐹=𝑅
𝑗
𝑅 = 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑗 = 𝑖𝑠 𝑡ℎ𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑, 𝑎𝑛𝑑
𝑛 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
Example
• In order to save for high school graduation, Marie decided to save
₱200.00 at the end of each month. If the bank pays 0.250%
coumpounded monthly, how much will her money be at the end of 6
years?
SOLUTION:
Given:
𝑅 = 200 𝑡=6
𝑚 = 12 𝑛 = 𝑚𝑡 = 12 6 = 72 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
𝑖 𝑚 = 0.250% = 0.0025
0.0025
𝑗= = 0.0002083. . .
12
Find: 𝐹
 (1 + 𝑛
𝑗) −1
𝐹=𝑅
𝑗
72
(1 + 0.0002083. . . ) −1
𝐹 = 200
0.0002083. . .
𝐹 = ₱14,507.02
Example
• Suppose Mrs. Remoto would like to save ₱3,000
at the end of each month, for six months, in a
fund that gives 9% compounded monthly. How
much is the amount or future value of her
savings after 6 months?
Present Value of an Ordinary Annuity
(Annuity Immediate)

−𝑛
1 − (1 + 𝑗)
𝑃=𝑅
𝑗
𝑅 = 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑗 = 𝑖𝑠 𝑡ℎ𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑, 𝑎𝑛𝑑
𝑛 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
Example
• Suppose Mrs. Remoto would like to know the present
value of her monthly deposit of 3,000 when interest is
9% compounded monthly. How much is the present
value of her savings at the end of 6 months?
Cash Value/Cash Price
• It is equal to the down payment (if there is any ) plus the
present value of the installment payments.

𝐶𝑎𝑠ℎ 𝑉𝑎𝑙𝑢𝑒 = 𝐷𝑜𝑤𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒

Cash Value/Cash Price
• Mr Ribaya paid ₱200,000 as down payment for a car. The
remaining amount is to be settled by paying ₱16,200 at the
end of each month for 5 years. If interest is 10.5%
compounded monthly, what is the cash price of his car?
Seatwork
• Find the present value P and amount F of the following ordinary
annuities.
a. Quarterly payments of ₱2,000 for 5 years with interest rate of 8%
compounded quarterly.
b. Semi annual payments of ₱8,000 for 12 years with interest rate of
12% compounded semi-annually.
c. The buyer of a lot pays ₱50,000 cash and ₱10,000 every month for
10 years. If money is 8% compounded monthly. How much is the
cash value of the lot?