Regular Payment of an

Annuity
Prepared by: Karla Jane F. Bangaysiso
In previous examples, we used the formula:
1+𝑖 𝑛 −1
• 𝐹𝑉 = 𝑃 to solve the future value or amount of simple
𝑖
ordinary annuity,
1− 1+𝑖 −𝑛
• 𝑃𝑉 = 𝑃 to solve the present value or amount of
𝑖
simple ordinary annuity,
1+𝑖 𝑛 −1
• 𝐹𝑉 = 𝑃 ∙ (1 + 𝑖) to solve the future value or amount of
𝑖
simple annuity due, and
1− 1+𝑖 −𝑛
• 𝑃𝑉 = 𝑃 ∙ (1 + 𝑖) to solve the present value or amount of
𝑖
simple annuity due.
Manipulating these equations, we
can solve for the regular payment or
periodic payment P, using the
following formula.
Regular Payment (P) of an Annuity
Simple Ordinary Annuity
𝐹𝑉 𝑖 FV = Future Value
𝑃= i = interest rate per period
1+𝑖 𝑛−1
where:
𝑃𝑉 𝑖 𝑟→ Annual rate
𝑃= 𝑖=
−𝑛 𝐾→ Number of conversion periods in a year
1− 1+𝑖
n = total number of conversion
periods
𝑛 =𝑡∙𝐾
t = number of years
 Regular Payment (P) of an Annuity
Simple Annuity Due
𝐹𝑉 𝑖 FV = Future Value
𝑃= i = interest rate per period
1+𝑖 𝑛−1 1+𝑖
where:
𝑃𝑉 𝑖 𝑟→ Annual rate
𝑃= 𝑖=
𝐾→ Number of conversion periods in a year
1 − 1 + 𝑖 −𝑛 1 + 𝑖
n = total number of conversion
PV = Present Value periods
𝑛 =𝑡∙𝐾
t = number of years
Regular Payment of a Simple Annuity
Example # 1
Mary borrows P500 000 to buy a car. She has two options to repay her
loan. The interest is compounded monthly.
Option 1: 24 monthly payments every beginning of the month at 12% per year.
Option 2: 60 monthly payments every end of the month at 15% per year.
Find: a. Mary’s monthly payments under each option.
b. The interest Mary pays under each option.
Regular Payment of a Simple Annuity
Example # 2
Eva obtained a loan of P50 000 for the tuition fee of her son. She has to
repay the loan by equal payments at the end of every six months for 3
years at 10% interest compounded semi-annually. Find the periodic
payment.
The gradual extinction of a loan over a period of time by means of
a sequence of regular equal payments as to principal and interest
due at the end of equal intervals of time is known as amortization.

In the previous example, we can say that the loan of P50 000 that
is amortized by equal periodic or installment payments of P9
850.87 at equal intervals end of every 6 months, becomes the
present value of the simple annuity.

When a loan is gradually repaid, the construction of an

amortization schedule is important for both the lender and
lendee. They will both see how much of each payment goes to the
interest and how much is applied to the reducing principal.
 The Amortization Schedule
Period Periodic Payment at Interest at 10% due at Amount repaid to the Outstanding Principal
the end of every 6 the end of every 6 Principal at the end of at the end of every 6
months months every 6 months months
(A) (B) (C) (D) (E)
0 P50 000.00
1 P9 850.87 P2 500.00 P7 350.87 P42 649.13
2 P9 850.87 P2 132.46 P7 718.41 P34 930.72
3 P9 850.87 P1 746.54 P8 104.33 P26 826.39
4 P9 850.87 P1 341.31 P8 509.56 P18 316.84
5 P9 850.87 P915.84 P8 935.03 P9 381.81
6 P9 850.87 P469.09 P9 381.81 P0.00
Total P59 105.22 P9 105.24 P50 000.00
Regular Payment of a Simple Annuity
Example # 3
Exponent Corporation is required to pay 8 annual installments of P2
500 000.00 each for a loan to pay for expansion at 12% compounded
annually. How much is the loan? Construct the amortization schedule.