MATH of INVESTMENT SIMPLE ANNUITIES

LESSON 8: Classification of Annuities & Ordinary Annuity

 Definition of Terms LEARNING OUTCOMES:

 Classification of simple annuities At the end of the discussion, the student should be able to:
 PV, Cash Value & FV of Ordinary
Annuity 1. Define basic terms;
 Periodic Payment and Term of 2. Classify the different types of annuity;
Ordinary Annuity
3. Calculate the PV, CV, FV, Periodic payment, term and
 Concluding Payment of Ordinary
Annuity concluding payment of ordinary annuity;
annuities-advisors.com

OVERVIEW of the LESSON

An annuity is a contract between you—the annuitant

—and an insurance company. In return for your contributions,
the insurer promises to pay you a certain amount of money,
on a periodic basis, for a specified period. Many people buy
annuities as a kind of retirement-income insurance, which
guarantees them a regular income stream after they've left
the workforce, often for the rest of their life.

DEVELOPMENT of the LESSON

TERMS to REMEMBER
 is a series of periodic payments (usually equal) made at
regular intervals of time
 is a form of insurance or investment entitling the
ANNUITY investor to a series of annual sums
 is a long-term investment that is issued by an insurance
company and is designed to help protect you from the
risk of outliving your income.
 is the length of time between two successive payments
PAYMENT of INTERVAL (rent period)
PERIODIC PAYMENT  is the size of each payment
 the time between the beginning of the first payment
TERM of ANNUITY
interval and the end of the last payment interval

EXAMPLES of ANNUITIES:
1. installment payments
2. rental payments
3. life insurance premiums
4. weekly wages
5. periodic pensions
MATH of INVESTMENT SIMPLE ANNUITY

There are three

classification of
annuities.

lifeannuities.com

ANNUITIES CLASSIFIED by TERM

 is an annuity whose the term begins and ends on definite
dates
 is an annuity payable for a definite duration
ANNUITY CERTAIN
Ex. Monthly payment on a car or house loan
Quarterly payments on home mortgage
 is an annuity whose term begins on a definite date but the
ending date is not fixed in advance, it depends on some
conditions happening in the future
CONTINGENT ANNUITY  is an annuity payable for an indefinite duration in which the
beginning or termination is dependent on some certain
events
Ex. Pensions, life insurance policies
 is an annuity in which the periodic payments begin on a fixed
date and continue indefinitely
Ex. Fixed coupon payments on permanently invested (irredeemable)
PERPETUITY sums of money
Preferred stock, where the perpetuity calculation assumes the
company will continue to exist in the market and keep paying
dividends

ANNUITIES CLASSIFIED by DATES of PAYMENTS

 is an annuity in which the periodic payment is made at the

end of each payment interval
 is a series of equal payments made at the end of consecutive
ORDINARY ANNUITY periods over a fixed length of time
Ex. Consistent quarterly stock dividends
Home mortgage
 is an annuity whose payment is due immediately at the
beginning of each period
ANNUITY DUE  is an annuity whose periodic payments are made at the
beginning of the payment interval or every conversion period
Ex. Rent paid at the beginning of each month
Insurance payments which are made to cover services provided in
the period following the payment.
MATH of INVESTMENT SIMPLE ANNUITY

 is a type of annuity contract that delays the period in which

the annuity is converted into series of income payments
 is an insurance contract that promises to pay the buyer a
DEFFERED ANNUITY regular income or a lump sum of money at some date in the
future

Ex. Death benefit component

Supplementation of other retirement income of employees

ANNUITIES CLASSIFIED by LENGTH of PAYMENTS

 is an annuity whose interest conversion period is equal or the
same as the payment interval and the interest is
compounded on payment date
SIMPLE ANNUITY
Ex. Installment payment for an appliance at the end of each month
with interest compounded monthly
GENERAL ANNUITY  is an annuity whose payment interval does not coincide with
the interest compounding period
 is an annuity where the payment intervals are not the same
as the interest intervals

Ex. monthly payments of P500, but the interest is 6%, compounded

semi-annually

ORDINARY
FINDING the PRESENT VALUE, FUTURE
VALUE, & CASH VALUE of ORDINARY
ANNUITY

moneycrashers.com

LET’S GO!!!

PVOA = Pmt [1 – (1 + i)–n ] FVOA = Pmt[(1+ i)n – 1]

i i
CV = DP + PVOA
Where: PVOA = Present Value of Ordinary Annuity
FORMULAS:
FVOA = Future Value of Ordinary Annuity
Pmt = Periodic Payment of Ordinary Annuity
i = periodic rate
n = total number of conversion periods
CV = Cash Value
DP = Down Payment
 SIMPLE ANNUITY:
MATH of INVESTMENT ORDINARY ANNUITY

NOTE:
PRESENT VALUE of ORDINARY ANNUITY is the total or sum of ORDINARY
present value of all periodic payments.
FUTURE VALUE OF ORDINARY ANNUITY is the sum of all the
periodic payments and the compound interest on them
accumulated at the given interest rate.
CASH VALUE/CASH EQUIVALENT is the sum of the present
moneycrashers.com
value and the down payment.

1. Allan decides to set aside P2, 500 at the end of each month for his child’s college
education. If the child were to be born today, how much will be available for its college
education when s/he turns 19 years old? Assume an interest rate of 5% compounded
monthly.
Given: Pmt = P2, 500 m = 12 t = 18 years r = 5%
n = 216 i = 0.00417
Solution: FVOA = Pmt [(1 + i)n – 1] = 2500[(1.00417)216 – 1] = P873, 362.90
i 0.00417

Using the calculator (2500((1.00417216) – 1)) ÷ 0.00417 = P873, 362.90

2. A fund is to be created by investing P900 at the end of every 3 months for 15 years. If
money is worth 9% compounded quarterly, how much is in the fund at the end of the
term?
Given: Pmt = P900 m=4 t = 15 years r = 0.09
n = 60 i = 0.0225

Solution: FVOA = Pmt [(1 + i)n – 1] = 900[(1.0225)60 – 1] = P112, 005.39

i 0.0225

Using the calculator (900((1.022560) – 1)) ÷ 0.0225 = P112, 005.39

3. Jann asks you to help him determine the appropriate price to pay for an annuity offering
a retirement income of P5, 000 a month for 10 years. Assume the interest rate is 6%
compounded monthly.
Given: Pmt = P5, 000 m = 12 t = 10 years r = 6%
n = 120 i = 0.005
Solution: PVOA = Pmt [1 – (1 + i)–n ] = 5000[1 – (1.005)–120 ] = P450, 367.27
i 0.005
Using the calculator 5000(1 – (1.005–120)) ÷ 0.005 = P450, 367.27

4. How much money must you deposit now at 6% interest compounded quarterly in order
to be able to withdraw P3, 000 at the end of each quarter year for two years?
Given: Pmt = P3, 000 m=4 t = 2 years r = 6%
n=8 i = 0.015
Solution: PVOA = Pmt [1 – (1 + i)–n ] = 3000[1 – (1.015)–8 ] = P22, 457.78
 i 0.015
Using the calculator 3000(1 – 1.015–8) ÷ 0.015 = P22, 457.78 SIMPLE ANNUITY:
MATH of INVESTMENT
ORDINARY ANNUITY

5. A man purchases a house and lot and agrees to pay P150, 000 cash and P12, 500 at the
end of every 6 months for 20 years. What is the cash value of the house and lot if money
is worth 5% compounded semiannually?
Given: Pmt = P12, 500 m=2 t = 20 years r = 5%
DP = P150, 000 n = 40 i = 0.025

Solution: PVOA = Pmt [1 – (1 + i)–n] = 12, 500[1 – (1.025)–40] = P313, 784.69

i 0.025

CV = DP + PVOA CV = 150 000 + 313 784.69 = P463, 784.69

ORDINARY
FINDING the PERIODIC PAYMENT AND
TERM of an ORDINARY ANNUITY

moneycrashers.com

LET’S GO!!!

Pmt = PVOA (i) Pmt = FVOA (i)

[1 – (1 + i)–n] [(1 + i)n – 1]

FORMULAS: t = log Pmt – [log (Pmt – PVOAi)] t = [log(Pmt + FVOAi)] – log Pmt
m log (1 + i) m log (1 + i)

Where: PVOA = Present Value of Ordinary Annuity

FVOA = Future Value of Ordinary Annuity
Pmt = Periodic Payment of Ordinary Annuity
m = conversion period
i = periodic rate

1. A debt of P35 000 is due now. How much is the monthly payment necessary to cancel
the obligation in 1.5 years assuming money to be worth 12% converted monthly?
Given: PVOA = P35, 000 m = 12 t = 1.5 years r = 12%
n = 18 i = 0.01

Solution: Pmt = PVOA(i) Pmt = 35 000(0.01) = P2, 134.37

[1 – (1 + i)–n] [1 – (1.01 – 18)]
 SIMPLE ANNUITY:
MATH of INVESTMENT
ORDINARY ANNUITY

2. A computer which sells for P60 000 may be purchased for P20 000 down payment and
the balance in equal semiannual payments for 5 years. At 4% compounded
semiannually, determine semiannual payment.
Given: CV = P60 000 DP = P20 000 PVOA = P40 000 m=2
t = 5 years r = 4% n = 10 i = 0.02

Solution: Pmt = PVOA(i) Pmt = 40 000(0.02) = P4 453.06

[1 – (1 + i)–n] [1 – (1.02 –10)]

3. A man owes P80 000 due at the end of 8 years. How much should he set aside at the end
of every 6 months to accumulate to the amount of the debt, if money is worth 8%
compounded semiannually?
Given: FVOA= P80 000 t = 8 years m=2 r = 8%
n = 16 i = 0.04

Solution: Pmt = FVOA(i) Pmt = 80 000(0.04) = P3, 665.60

[(1 + i)n – 1] [(1.04)16 – 1]

4. How much must be deposited every month for 7 years in order to have P22, 500 at 4%
compounded bi-monthly?
Given: FVOA= P22 500 t = 7 years m=6 r = 4%
n = 42 i = 0.00667

Solution: Pmt = FVOA(i) Pmt = 22 500(0.00667) = P465.95

[(1 + i)n – 1] [(1.00667)42 – 1]

5. After retiring, a man placed his retirement pay of P3, 000, 000 in a bank paying 3%
interest converted monthly. How long will it take to exhaust his funds if he withdraws
P50, 000 at the end of each month?
Given: PVOA = 3, 000, 000 r = 3% m = 12
Pmt = P50, 000 i = 0.0025

Solution: t = log Pmt – [log (Pmt – PVOAi)]

m log (1 + i)
t = log 50000 – [log (50000 – 3 000 000(0.0025)) = 5.42 years
12 log(1.0025)
50000 – 3 000 000 x 0.0025 = log = - log 50 000 =  (12log1.0025) = 5.42

(log 50 000 – (log (50 000 – 3 000 000 x 0.0025)))  (12 log 1.0025) = 5.42

6. To build up a fund of P22, 000 for the purchase of a television set, a couple deposits
P800 at the end of each month in a bank which pays interest at 1.5% converted monthly.
When will the last full deposit be made?
Given: FVOA = 22, 000 r = 1.5% m = 12
Pmt = P800 i = 0.00125

Solution: t = [log(Pmt + FVOAi)] – log Pmt

 m log (1 + i)
t = [log(800 + 22000(0.00125)) – log 800 = 2.25 years
12 log(1.00125) SIMPLE ANNUITY:
MATH of INVESTMENT
ORDINARY ANNUITY

FINDING the CONCLUDING PAYMENT of

ORDINARY an ORDINARY ANNUITY

CONCLUDING PAYMENT is the final

payment which has a smaller value
than the original periodic payment.
moneycrashers.com

LET’S GO!!!
When FVOA is given:
1. Compute for the time or number of payments.
t = [log(Pmt + FVOAi)] – log Pmt
m log(1 + i)
2. Determine the amount one period after the last regular
STEPS &
payment
FORMULAS
FVOAL = Pmt {[(1 + i)n + 1 – 1] – 1}
i
3. Subtract the FVOAL from the original amount to get the
concluding payment
CP = FVOA – FVOAL

1. Find the number of semiannual payment of P480 each and the concluding payment
which must be made to accumulate P18, 500, if money earns interest at 7%,
compounded semiannually.
Given: Pmt = P480 FVOA = P18, 500 r = 7%
m=2 i = 0.035
Solutions:
1. t = [log(Pmt + FVOAi)] – log Pmt
m log(1 + i)
t = [log(480 + 18500(0.035)] – log 480 = 12.41 years
2 log(1.035)
((log (480 + 18 500 x 0.035)) – log 480)  (2 log 1.035) =
n = 2(12.41) = 24.82 (Use only the whole number n = 24)

2. FVOAL = Pmt {[(1 + i)n + 1 – 1] – 1} where n + 1 = 24 + 1 = 25

i
FVOAL = 480{ (1.035)25 – 1 – 1} = P18, 215.93
0.035
3. CP = FVOA – FVOAL
CP = 18 500 – 18 215.93 = P284.07
 MATH of INVESTMENT SIMPLE ANNUITY:
ORDINARY ANNUITY
LET’S GO!!!
When PVOA is given:
1. Compute for the time or number of payments.
STEPS & FORMULAS
t = log Pmt – [log (Pmt – PVOAi)]
m log(1 + i)
2. Determine the amount one period after the last regular
payment
FVOAL = Pmt {[(1 + i)n + 1 – 1] – 1}
i
3. Find the present value one period after the last regular
payment
CA = PVOA (1 + i)n

4. Solve for the concluding payment

CP = CA – FVOAL

1. Ogan borrows P20 000 with interest at 5 ½% compounded quarterly. He agrees to pay P850
at the end of each three months. How long must he pay? What is the size of the concluding
payment?
Given: Pmt = P850 PVOA = P20, 000 r = 5 ½%
m=4 i = 0.01375
Solutions:
1. t = log Pmt – [log (Pmt – PVOAi)]
m log(1 + i)
t = log 850 – [log (850 – 20 000(0.01375)] = 7.16 years
4 log(1.01375)
n = 4(7.16) = 28.64 (Use only the whole number n = 28)

2. FVOAL = Pmt {[(1 + i)n + 1 – 1] – 1} where n + 1 = 28 + 1 = 29

i
FVOAL = 850 {[(1.01375)29 – 1] – 1} = P29, 188.63
0.01375
850 (((1.1037529 – 1)  0.01375) – 1) =
3. CA = PVOA (1 + i) n + 1
CA = 20 000(1.01375)29 = P29, 718.38

4. CP = CA – FVOAL
CP = 29 718.38 – 29 188.63 = P529.75

References:
https://courses.lumenlearning.com/ivytech-collegealgebra/chapter/solving-annuity-
problems/
https://www.mathsisfun.com/money/annuities.html
https://www.investopedia.com/terms/o/ordinaryannuity.asp
https://www.investopedia.com/retirement/calculating-present-and-future-value-of-
annuities/
https://courses.lumenlearning.com/sanjacinto-finitemath1/chapter/4-3-exercises-
annuities/
 SIMPLE ANNUITY:
ORDINARY ANNUITY
MATH of INVESTMENT

TRY THIS…
EXERCISE 1: Give what is asked in each statement given below by showing your solution/s.
1. Igor Kalugin is an athlete who believes that his playing career will lasts 7 years. He deposits
$22, 000 at the end of each year for 7 years in an account paying 6% compounded annually.
How much will he have on deposit after 7 years?

2. Find the cash value of a sala set that can be bought for P2, 500 down payment and P350 at
the end of each month for 36 months, if money is worth 6% compounded monthly.

3. Freddie received an inheritance of P25 000 a year when he was 12 years old. However, this
was to be invested and allowed to accumulate at 7% effective until he reaches the age of 21.
What amount will he receive when he reaches the age of 21?

4. If money is worth 7 ½% converted semiannually. What single payment now is equivalent to 10

semiannual payments of P6, 250?

5. How much monthly deposit must be made for 8 years and 6 months in order to accumulate
P125, 300 at 7% compounded monthly?
 SIMPLE ANNUITY:
ORDINARY ANNUITY
MATH of INVESTMENT

TRY THIS…
EXERCISE 2: Fill out the table with the appropriate value.

FVOA PVOA Pmt Term Rate

1. P495 5 ½ years 4 ½%, m = 2

2. P5, 500 6 months 3%, m = 1

3. P65, 520 P3, 500 8%, m = 4

4. P25, 000 9 years 6%, m = 6

5. P75, 625 P2, 700 12%, m = 12

EXERCISE 3: Compute for the concluding payment in each of the problem by showing your solutions.
1. A man deposits P320 at the end of each 3 months in an account paying 6% converted
quarterly. In order to accumulate P9, 400, how many regular deposit every 3 months must he
make and what is the size of the concluding payment, if one is needed?

2. An item is for sale for P7, 800. Mr. Bing Fernando can pay P2, 200 down payment and P240
every end of the month. If he gets the loan at 7% compounded monthly, how many regular
payments of P240 must he make and what will be the size of the concluding payment?
 SIMPLE ANNUITY:
MATH of INVESTMENT Annuity Due

LESSON 9: Annuity Due

 Present Value of an Annuity Due LEARNING OUTCOMES:

 Future Value of an Annuity Due
 Periodic Payment of Annuity Due At the end of the discussion, the student should be able to:
 Term of an Annuity Due
1. Solve for the present value and future value of

annuity due;
2. Find the periodic payment of annuity due;
3. Compute for the term of annuity due.

OVERVIEW of the LESSON

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An annuity due requires payments made at the
beginning, as opposed to the end, of each annuity period.
Annuity due payments received by an individual legally
represent an asset. Meanwhile, the individual paying the
annuity due has a legal debt liability requiring periodic
payments.
Annuity due is an annuity whose payment is
due immediately at the beginning of each period. A common
example of an annuity due payment is rent, as landlords often
require payment upon the start of a new month as opposed to
collecting it after the renter has enjoyed the benefits of the
apartment for anofentire
DEVELOPMENT month.
the LESSON
LET’S GO!!!
FORMULAS: PVAD = Pmt [1 – (1 + i)–n ] ( 1 + i) Pmt = PVAD (1 + i)
i [1 – (1 + i)–n ] ( 1 + i)

FVAD = Pmt [(1+ i)n – 1] (1 + i) Pmt = FVAD (1 + i)

i [(1+ i)n – 1](1 + i)
Where: PVAD = Present Value of Annuity Due
FVAD = Future Value of Annuity Due
Pmt = Periodic Payment of Annuity Due
i = periodic rate
n = total number of conversion periods

1. An individual makes a rental payments of P1, 200 per month and wants to know the
present value of their rentals over a 12-month period. The payments are made at the
start of each month. The current interest rate is 8% per annum.
Given: Pmt = P1, 200 n = 12 m = 12 r = 8% i = 0.00667
Solution: PVAD = Pmt [1 – (1 + i)–n ] ( 1 + i)
i
PVAD = 1200[1 – (1.00667)–12] (1.00667) = P13, 886.66
0.00667
 SIMPLE ANNUITY:
MATH of INVESTMENT Annuity Due

2. A company wants to invest P22, 500 every six months for four years to purchase a
delivery truck. The investment will be compounded at an annual interest rate of 12% per
annum. The initial investment will be made now, and thereafter, at the beginning of
every six months. How much is the future value of the cash flow payments?
Given: Pmt = P22, 500 t = 4 years r = 12% m=2
n=8 i = 0.06
Solution:
FVAD = Pmt [(1+ i)n – 1] (1 + i)
i
FVAD = P22 500[(1.06)8 – 1] (1.06) = P236, 054.61
0.06
3. What is the cash equivalent of an item that was purchased for P1, 800 down payment
and P250 at the beginning of each 2 months for 3 years and 6 months if interest is 5%
converted bi-monthly?
Given: DP = P1, 800 Pmt = 250 t = 3 years & 6 months r = 5%
m=6 i = 0.00833 n = 21
Solution: PVAD = Pmt [1 – (1 + i)–n ] ( 1 + i)
i
PVAD = 250[1 – (1.00833)–21] (1.00833) = P4, 838.16
0.00833
CE = DP + PVAD = 1 800 + 4 838.16 = P6, 638.16
4. An annuity contract provides for the payment of P1, 200 at the beginning of each 3
months for 8 years. If money is worth 7% compounded quarterly, what is the amount of
the annuity at the end of the term?
Given: Pmt = P1, 200 t = 8 years r = 7% m=4
n = 32 i = 0.0175
Solution:
FVAD = Pmt [(1+ i)n – 1] (1 + i)
i
FVAD = P1200[(1.0175)32 – 1] (1.0175) = P51, 785.30
0.0175
NOTE:
 The present value of an annuity due (PVAD) is the
sum of the present value of each annuity
payment.
 The future value of an annuity due (FVAD) is
simply the sum of the future value of each
payment.
 The present value of annuity due is always greater
than the present value of ordinary annuity. griffininsurance.net
 The future value of annuity due is always greater
than the future value of ordinary annuity.
 SIMPLE ANNUITY:
MATH
- of INVESTMENT Annuity Due
lifeannuities.com

PERIODIC PAYMENT & TERM of

ANNUITY DUE

Pmt = FVAD (i) Pmt = PVAD (i)

LET’S GO!!! [(1 + i) [(1 + i)n – 1] (1 + i) [ 1 – (1 + i)–n]
where: FVAD = future value of annuity due
PVAD = present value of annuity due
FORMULAS:
Pmt = periodic payment of annuity due
i = periodic payment
n = total number of conversions
1. You want to borrow P200, 000 to buy a house. How much is the monthly mortgage
payment made at the beginning of each month if the interest rate is 6% for 30 years?
Given: PVAD = P200 000 t = 30 years r = 6% m = 12
n = 360 i = 0.005
Solution:
Pmt = PVAD (i)
(1 + i) [1 – (1 + i)–n]
Pmt = 200 000(0.005) = P1, 193.14
–360
(1.005)[1 – (1.005) ]

2. An item will need replacing 5 years from now at a cost of P120, 800. How much should
the owner save at the beginning of each quarter in order to replace the item if his
savings earn at 8 ½% compounded quarterly?
Given: FVAD = P120, 800 t = 5 years r = 8 ½% m=4
n = 20 i = 0.02125
Solution:
Pmt = FVAD (i)
(1 + i) [(1 + i)n – 1]
Pmt = 120, 800(0.02125) = P4, 807.98
20
(1.02125)[(1.02125) – 1]

3. An obligation of P30, 000 will be settled by 80 equal semiannual monthly payments, the
first payment is to be made immediately. How much is the size of the semiannual
payment if money is worth 4% converted semiannually?
Given: PVAD = P30 000 n = 80 r = 4% m=2
i = 0.02
Solution:
Pmt = PVAD (i)
(1 + i) [1 – (1 + i)–n]
 Pmt = 30 000(0.02) = P740.02
–80
(1.02)[1 – (1.02) ]
SIMPLE ANNUITY:
MATH of INVESTMENT Annuity Due
–1

TERM of ANNUITY DUE

n = 1 – log 1 – (PVAD – Pmt) (i)

LET’S GO!!! Pmt
log (1 + i)
FORMULAS:
n = log (FVAD + Pmt) (i) + 1
Pmt –1
log (1 + i)

where: FVAD = future value of annuity due

PVAD = present value of annuity due
Pmt = periodic payment of annuity due
i = periodic payment
n = total number of conversions

1. Jessy invests P3, 750 at the beginning of each 2 months at 9% converted bi-monthly.
How long will it take for the annuity to amount to P90, 000?
Given: Pmt = P3, 750 FVAD = P90, 000 m=6 r = 9% i = 0.015
Solution:
n = log (FVAD + Pmt) (i) + 1 –1
Pmt
log (1 + i)

n = log (90000 + 3750)(0.015) + 1 –1 n = 20.39 times or t = 3.40

years
3750
log 1.015

2. To ettle an obligation of P20, 000, semi-monthly payment of P5, 000 each, with the first
due now, must be made if interest is allowed at 9%, compounded semi-monthly. How
many P5, 000–payment must be made?
Given: Pmt = P5, 000 PVAD = P20, 000 m=6 r = 9% i = 0.015
Solution:
n= log 1 – (PVAD – Pmt) (i)
1– Pmt
log (1 + i)

n= log 1 – (20000 – 5000)(0.015) n = 4.09 times

1–
5000
 log (1.015)

SIMPLE ANNUITY:
MATH
– 1 of INVESTMENT Annuity Due

3. Find the term of an annuity due whose present value is P8, 000 and whose semiannual
payment is P625 at 7%, compounded semiannually.
Given: Pmt = P625 PVAD = P8, 000 m=2 r = 7% i = 0.035
Solution:
n= log 1 – (PVAD – Pmt) (i)
1– Pmt
log (1 + i)

n= log 1 – (8000 – 625)(0.035) n = 16.49 times or t = 8.25 years

1–
625
log (1.035)

4. How long must P675 be placed in a fund at the beginning of each 3 months in order to
have P30, 000, if money is worth 9% compounded quarterly?
Given: Pmt = P675 FVAD = P30, 000 m=4 r = 9% i = 0.0225
Solution:
n = log (FVAD + Pmt) (i) + 1 –1
Pmt
log (1 + i)

n = log (30000 + 675)(0.0225) + 1 –1 n = 30.65 times or t = 7.66 years

675
log 1.0225

References:
https://www.youtube.com/watch?v=joBu9TnFngQ
https://thismatter.com/money/investments/present-value-future-value-of-annuity.htm
https://courses.lumenlearning.com/ivytech-collegealgebra/chapter/solving-annuity-
problems/
https://www.investopedia.com/terms/a/annuitydue.asp
https://www.mathsisfun.com/money/annuities.html
https://corporatefinanceinstitute.com/resources/knowledge/finance/annuity-due/
https://www.investopedia.com/retirement/calculating-present-and-future-value-of-
annuities/
https://courses.lumenlearning.com/sanjacinto-finitemath1/chapter/4-3-exercises-annuities/
 SIMPLE ANNUITY:
MATH of INVESTMENT ORDINARY ANNUITY

TRY THIS…
EXERCISE 1: Give what is asked in each statement given below by showing your solution/s.
1. At the beginning of each month, P10, 000 is deposited into a retirement fund. The fund earns 6%
annual interest, compounded monthly. How much is in the account if deposits are made for 10
years?

2. The monthly rent on an apartment is P9, 500 per month payable at the beginning of each month.
If the current interest is 12% compounded monthly, what single payment 12 months in advance
would be equal to a year’s rent?

3. A deposit of P5, 000 is placed into a college fund at the beginning of every 3 months for 15 years.
The fund earns 7% annual interest, compounded quarterly. How much is in the account right
after the last deposit.

4. Jhonny deposits P15, 000 at the beginning of each year in a bank which pays 8% effective. How
long will it take him to accumulate P200, 000?
MATH of INVESTMENT SIMPLE ANNUITY:
ORDINARY ANNUITY

TRY THIS…
EXERCISE 1: Give what is asked in each statement given below by showing your solution/s.

5. A debt of P24, 500 is due in 3 years. The debtor agrees to discharge this obligation with equal
quarterly payments, the first to be made now. If money is worth 4.5% compounded quarterly, what
is the size of the quarterly payment?

6. A man owes P37, 500 due in 8 years. How much must he set aside at the beginning of each 2
months to accumulate to the amount of the debt, if money is worth 12% compounded bi-monthly.

7. To settle an obligation of P100, 000, monthly payment of P4, 500 each, with the first due now,
must be made if interest is allowed at 9%, compounded monthly. How many P4, 000–payment
must be made?

8. How much is the cash value of a TV set that was purchased for P10, 000 down payment and P500
at the beginning of each month for 3 years, if interest is 5% converted monthly?
 SIMPLE ANNUITY:
MATH of INVESTMENT Deferred Annuity

LESSON 10: Deferred Annuity

 Definition of Terms LEARNING OUTCOMES:

 Types of Deferred Annuity At the end of the discussion, the student should be able to:
 Periodic Payment of Deferred Annuity
 Present Value of Deferred Annuity 1. Define basic terms;
2. Identify the types of deferred annuities;
3. Solve periodic payment of deferred annuity;
4. Calculate the present value of deferred annuity.
OVERVIEW
As life expectancies continue to grow, many people are looking
to supplement their existing financial strategies when determining how
to save for retirement for longer periods. A deferred annuity is one tool
that can serve just such a purpose. If you have several years until
retirement, a deferred annuity could make sense for you.

DEVELOPMENT of the LESSON fmiblogspot.com

LET’S GO!!!
 A deferred annuity is a financial transaction where annuity payments are delayed until a
certain period of time has elapsed.
 Deferred annuity is also defined as an insurance contract designed for long-term savings
where investors can delay payments indefinitely.
Usually the annuity has two stages, as depicted in this figure.

1. ACCUMULATION STAGE. A single payment is allowed to earn interest for a specified

duration. There are no annuity payments during this period of time, which is commonly
referred to as the period of deferral.
2. PAYMENTS STAGE. The annuity takes the form of any of the four annuity types and
starts at the beginning of this stage as per the financial contract. Note that the maturity
value of the accumulation stage is the same as the principal for the payments stage.
 The interest rate on deferred annuities can be either variable or fixed. However, since
deferred annuities are commonly used to meet a specific need, fixed interest rates are
more prevalent since they allow for certainty in the calculations.
 SIMPLE ANNUITY:
MATH
 of INVESTMENT Deferred Annuity

TYPES of DEFFERED ANNUITIES

 Works like a certificate of deposit, but the interest is
deferred until you take a withdrawal from the annuity
contract. Upon purchase, you’ll be told the guaranteed
interest rate your funds will earn.
FIXED DEFERRED
 It is the most stable option, but it could also have a lower
ANNUITY
return. The interest rate is determined when you
purchase the annuity, and it never changes.
NOTE: Fixed annuities promise a specific, guaranteed rate of return
on the money in the account.
 A lot like owning a group of mutual funds. In an annuity,
they’re called sub-accounts. You have control over the
amount of investment risk by choosing from a pre-
selected list of sub-accounts, including both bond and
equity investments. Returns vary depending on the
performance of the underlying sub-accounts.
 Investing in a variable deferred annuity is a lot like
VARIABLE DEFFERED owning a group of mutual funds. These mutual funds are
ANNUITY called sub-accounts when they are in an annuity. You
have control over the amount of investment risk you
have by choosing from a pre-selected list of sub-accounts
including both bond and equity investments. Your
investment returns will vary depending on the
performance of those underlying sub-accounts.
NOTE: The return on variable annuities is based on the
performance of a portfolio of mutual funds, or sub-accounts, chosen
by the annuity owner.
 It functions like a fixed annuity in some ways and like a
variable annuity in other ways. Technically, it is a type of
fixed annuity. Equity-indexed annuities have two
components: a minimum guaranteed return and the
EQUITY–INDEXED possibility of earning a higher return by tying it to a stock
ANNUITY market index.
 Equity-indexed annuities have two components: a
minimum guaranteed return, and the possibility of
earning a higher return by crediting your account with a
return based on a formula that is tied to a popular stock
market index.
NOTE: Indexed annuities provide a return that is based on the
performance of a particular market index
 The insurance company guarantees to provide you with a
specified amount of lifelong income by age 85, let’s say,
LONGEVITY ANNUITY deferring taxes and income until that age when you start
taking money out.
 When you purchase a longevity annuity, it is like
 purchasing “long life expectancySIMPLE
insurance”.
ANNUITY:
MATH of INVESTMENT Deferred Annuity
annuitypal.com

FINDING THE PRESENT VALUE & FUTURE

VALUE of DEFERRED ANNUITY

FVD = Pmt [(1 + i) n – 1] PVD = Pmt [1 – (1 + i) –(d + n) ] – [1 – (1 + i) –d)]

i i i
Where:
FVD = future value of deferred annuity
FORMULAS: PVD = present value of deferred annuity
Pmt = periodic payment
i = periodic rate
n = total number of conversions
LET’S GO!!!
d = number of deferred period (period of deferment)
1. Find the future value of an annuity of P1, 000 payable at the end of each quarter for
6 payments, the interest rate is 6% compounded quarterly. The first payment is due
at the end of nine months.
Given: Pmt = P1, 000 r = 6% m=4 n=6
i = 0.015
Solution:
NOTE: In computing the future value of deferred annuity, the portion of
deferment may be disregarded
FVD = Pmt[(1 + i)n – 1] FVD = 1000[(1.015)6 – 1]= P6, 229.55
i 0.015

2. Find the future value of an annuity of P1, 000 payable at the end of each quarter for
6 payments, the interest rate is 6% compounded quarterly. The first payment is due
at the end of nine months.
Given: Pmt = P1, 000 r = 6% m=4 n=6
i = 0.015 d = 2 (2 quarters or 6 months)
Solution 1:
STEP 1: Find the present value assuming that payments were made even during the
period of deferment. Hence the total number of compounding periods is d + n--------
2+6=8
PVD = Pmt [1 – (1 + i) – n] PVD = 1000[1 – (1.015) –8] = P7, 485.93
i 0.015

STEP 2: Find the present value assuming only d, the period of deferment as the total
number of compounding periods------2
PVD = Pmt [1 – (1 + i) –n] PVD = 1000[1 – (1.015) –2] = P1, 955.88
i 0.015
STEP 3: Subtract the present value in STEP 2 from the present value in STEP 1. The
difference is the present value of the deferred annuity.

PVD = 7 485.93 – 1 955.88 = P5, 530.05

 SIMPLE ANNUITY:
MATH of INVESTMENT Deferred Annuity
Present Value and
SOLUTION 2: n=6 d=2 d+n=2+6 Future Value of
Deferred
PVD = Pmt [1 – (1 + i) – (d + n) ] – [1 – (1 + i) –d)]
i i

PVD = 1000 [1 – (1.015) – 8] – [1 – (1.015) – 2]

0.015 0.015

PVD = 1 000 (7.48592508 – 1.955883424)

PVD = P 5, 530.05 dhls.com

3. What is the present value of a deferred annuity of P480 each every 3 months for 7
years if the first payment is made in 4 years and money is worth 5 ½% compounded
semiannually?
Given: Pmt = P480 r=5½% m=2 i = 0.0275
t = 7 years n = 14 d = 4(2) = 8 – 1 = 7
Solution 1:
PVD = Pmt [1 – (1 + i) – (d + n) ] – [1 – (1 + i) –d)]
i i

PVD = 480 [1 – (1.0275) – 21] – [1 – (1.0275) – 7]

0.0275 0.0275

PVD = 480 (15.79294612 – 6.289408056)

PVD = P 4, 561.70
Solution 2:
STEP 1: Find the present value assuming that payments were made even during the period
of deferment. Hence the total number of compounding periods is d + n-------- 14 + 7 = 21
PVD = Pmt [1 – (1 + i) – n] PVD = 480[1 – (1.0275) – 21] = P7, 580.61
i 0.0275
STEP 2: Find the present value assuming only d, the period of deferment as the total number
of compounding periods------ 2
PVD = Pmt [1 – (1 + i) – n] PVD = 480[1 – (1.0275) – 7] = P3, 018.92
i 0.0275
STEP 3: Subtract the present value in STEP 2 from the present value in STEP 1. The difference
is the present value of the deferred annuity.

PVD = 7 580.61 – 3 018.92 = P4, 561.70

4. Determine the present value of a deferred annuity of P9, 000 every 3 months for 5 years
that is deferred 3 years, if money is worth 5% compounded quarterly.
Given: Pmt = P9, 000 r = 5% m=4 i = 0.0125
t = 5 years n = 20 d = 3(4) = 12
Solution:
PVD = Pmt [1 – (1 + i) – (d + n) ] – [1 – (1 + i) –d)]
i i
 PVD = 9000 [1 – (1.0125) – 32] – [1 – (1.0125) – 12] SIMPLE ANNUITY:
= P136, 457.66
MATH of INVESTMENT Deferred Annuity
0.0125 0.0125

Pmt = PVD
FORMULA: [1 – (1+i) –(d + n)] – [1 – (1+i) –d]
i i
Where
Pmt = periodic payment
PVD = present value
d = period of deferment
n = total number of conversions
i = periodic rate
LET’S GO!!!
1. A man borrows P40, 000, with interest at 8%, compounded quarterly. He agrees to
discharge his obligation by making a series of equal payments, the first due at the end of
2 years and the last at the end of seven years. What is the size of each quarterly
payment?
Given: PVD = P40, 000 r = 8% m=4 i = 0.02

t = 7 years n = 4 (7 – 2) + 1 = 21 d = 4 (2) – 1 = 7
Solution:

Pmt = PVD
– (d + n)
[1 – (1+i) ] – [1 – (1+i) –d]
i i
Pmt = 40 000
[1 – (1.02) – 28] – [1 – (1.02) – 7]
0.02 0.02
Pmt = 40 000
[21.28127236 – 6.471991069]

Pmt = P2, 701.01

2. Arden Anyon borrows P10, 000 at 14% compounded semiannually and agrees to pay it in
14 equal semiannual payments. Find the size of eaach payment if the first payment is
due at the end of 3 ½ years.

Given: PVD = P10, 000 r = 14% m=2 i = 0.07

n = 14 d = 3 (2) = 6
Solution:
Pmt = PVD
– (d + n)
[1 – (1+i) ] – [1 – (1+i) –d]
i i
Pmt = 10 000
[1 – (1.07) – 20] – [1 – (1.07) – 6]
0.07 0.07
 annuitypal.com

Pmt = 10 000
[10.59401425 – 4.76653966]

Pmt = P1, 716.01 SIMPLE ANNUITY:

MATH of INVESTMENT Deferred Annuity

3. Find the semiannual payment at the end of every 6 months, the first payment is due at
the end of 7 ½ years and the last at the end of 18 years for a loan of P30, 900 if money is
worth 3 ½% compounded semiannually.
Given: PVD = P30, 900 r = 3 ½% m=2 i = 0.0175
t = 18 years n = 18 – 7 ½ = 10 ½ (2) = 21 + 1 = 22
d = 7 ½ (2) = 15 – 1 = 14
Solution:
Pmt = PVD
[1 – (1+i) – (d + n)] – [1 – (1+i) –d]
i i
Pmt = 30 900
[1 – (1.0175) – 36] – [1 – (1.0175) – 14]
0.0175 0.0175
Pmt = 30 900
[26.54275283 – 12.32200587]

Pmt = P2, 172.88

n = log Pmt
[Pmt – PVD(i) (1 + i)d]
log (1 + i)
FORMULA: Where
n = total number of conversions
Pmt = periodic payment
PVD = present value
i = periodic payment
d = total number of deferment
LET’S GO!!!
1. If P5, 000 is deposited at the end of each month and the interest rate is 6% compounded
monthly, how many months will be required for deposits to equal a present value of
P450, 000? The first deposit is made at the end of six months.
Given: Pmt = P5, 000 r = 6% m = 12 i = 0.005

PVD = P450, 000 d=5

Solution:
n = log Pmt
[Pmt – PVD(i) (1 + i)d]
log (1 + i)

n = log 5 000
[5 000 – 450 000(0.005) (1.005)5]
 log (1.005)

n = 124. 05

The first payment is due at the end of 6 months, therefore, there are 125 equal
monthly payments. SIMPLE ANNUITY:
MATH of INVESTMENT Deferred Annuity

2. Amy deposits P36, 000 in a banm which pays interest at 9% compounded semiannually.
She plans to withdraw P4, 500 every 6 months, the first of which is to be made at the
end of 4 years. How long will her investment last?

Given: Pmt = P4, 500 r = 9% m=2 i = 0.045

PVD = P36, 000 d = 4 (2) = 8 – 1 = 7

Solution:
n = log Pmt
[Pmt – PVD(i) (1 + i)d]
log (1 + i)

n = log 4 500
[4 500 – 36 000(0.045) (1.045)7]
log (1.045)

n = 15.29 times

t = 15.29 ÷ 2 = 7.65 years

References:
https://smartasset.com/retirement/what-is-deferred-annuity
https://dhls.com/what-is-a-deferred-annuity-and-how-does-it-work/
https://smartasset.com/retirement/what-is-deferred-annuity
https://math.libretexts.org/Bookshelves/Applied_Mathematics/Book%3A_Business_Math_(Olivier)/
12%3A_Compound_Interest_Special_Applications_Of_Annuities/12.01%3A_Deferred_Annuities
https://www.thebalance.com/all-about-deferred-annuities-2389020
https://tools.mheducation.ca/college/zima/graphics/zima5mfz_information/5mfz_sample.pdf
CERVILLON, CARMELITA C., et. al. Mathematics of Investment – A Worktext. Philippine Copyright 2003,
Reprinted 2009.
MALABORBOR, PASTOR B., et. al. Mathematics of Investment by Scientific Calculator. Philippine Copyright,
2000, Reprinted 2006
BALLADA, WINIFRE LU and BALLADA, SUSAN, Investment Mathematics Made Easy. 2003Philippine Copyright
 SIMPLE ANNUITY:
DEFERRED ANNUITY
MATH of INVESTMENT

TRY THIS…
EXERCISE 1: Give what is asked in each statement given below by showing your solution/s.

1. What amount must be set aside on a boy’s seventh birthday which will provide 24 quarterly
payments of P350 for school expenses, if the first payment is to be made on his 16 th birthday?
Assume that money is 6% compounded quarterly. Determine also the future value of the annuity.

2. What is the present value of an annuity of P430 each every 6 months for 12 years, if the first
payment is due in 4 years and 6 months? Money is worth 5% compounded semiannually.

-
3. A man Deposits P875 a month in a bank which pays interest at 9% compounded monthly, for 5
years. He starts to withdraw this fund 5 years later at P1, 000 a month. How long will his
investment last?
 SIMPLE ANNUITY:
DEFERRED ANNUITY
MATH of INVESTMENT

TRY THIS…
EXERCISE 1: Give what is asked in each statement given below by showing your solution/s.

4. If the money is worth 3 ½% compounded quarterly, what equal quarterly payments at the end of
each 3 months for 7 years and 9 months will pay off an obligation of P11, 200. The first payment is
due in 3 years and 3 months.

5. Belamy borrowed P65, 000 at7% compounded quarterly and agreed to repay the loan in quarterly
payments of P5, 000 each. The first payment is due in two years. Find the number of payments.

EXERCISE 2: Complete the table below by solving for the value of the unknown.
FVD PVD Pmt n d Compound Interest Rate

1 P200 15 5

2 P1, 000 10 3

3 P1, 600 P125 7

4 P600 14 12

5 P5, 000 20 6
MATH of INVESTMENT SIMPLE ANNUITIES:
Perpetuity

LESSON 11: PERPETUITY

LEARNING OUTCOMES:
 Definition of Terms At the end of the discussion, the student should be able to:
 Present Value of Simple Ordinary
Perpetuity
1. Define basic terms;
 Present Value of Simple Perpetuity 2. Find the present value of simple perpetuity due;
Due 3. Compute the present value of simple ordinary
perpetuity;
OVERVIEW

The concept of regular payments that extend

indefinitely is a common principle in finance. Perpetuity in the
financial system is a situation where a stream of cash flow
payments continue indefinitely or is an annuity that has no
end.It is used in many different valuation theories to evaluate
businesses, stock prices, and other investments. Perpetuities
are also use to find the present value of a company’s future
projected cash flow stream and the company’s terminal value.
Essentially, a perpetuity os a series of cash flows that keep
paying out forever.

DEVELOPMENT of the LESSON

LET’S GO!!!

TERMS to REMEMBER
 is a perpetual annuity, it is a series of equal
infinite cash flows that occur at the end of each
PERPETUITY period and there is equal interval of time between
the cash flows
SIMPLE ORDINARY  when the payments of perpetuity are made at the
PERPETUITY end of each interest period
 when the payments of perpetuity are made at the
SIMPLE PERPETUITY DUE
beginning of each interest period

PVO = Pmt PVA = Pmt + Pmt

i i

Where:
FORMULAS:
PVO = present value of simple ordinary perpetuity
PVO = present value of simple annuity due
i = periodic payment
Pmt = periodic payment
MATH of INVESTMENT SIMPLE ANNUITIES:
Perpetuity

PRESENT VALUE of SIMPLE ORDINARY

PERPETUITY & SIMPLE PERPETUITY DUE

quotemaster.org
1. Find the present Perpetuity
value of a simple perpetuity of P15, 000 payable at the end of each
quarter if the interest rate is 2% per quarter.
Given: Pmt = P15, 000 i = 0.02
Solution: PVO = Pmt PVO = 15000 ÷ (0.02) = P750, 000
i
2. What is the present value of a simple perpetuity of P4, 000 payable at the beginning of
each month if the interest rate is 12% compounded monthly?
Given: Pmt = P4, 000 r = 12% m = 12 i = 0.01
Solution: PVA = Pmt + Pmt PVA = 4000 + 4000 = P404, 000
i 0.01
3. Find the value of simple perpetuity due whose periodic payment is P10, 000 at 8 ¾%
compounded semiannually.
Given: Pmt = P10, 000 r = 8 ¾% m=2 i = 0.04375
Solution: PVA = Pmt + Pmt PVA = 10 000 + 10 000 = P238, 571.43
i 0.04375
4. Determine the present value of a simple ordinary perpetuity of P5, 000 at 8%
compounded quarterly payable at the end of each quarter for:
a. 20 years b. 25 years c. 50 years
Given: Pmt = P5, 000 r = 8% m=4 i = 0.02
Solutions: a. t = 20 years n = 80
PV = Pmt [1 – (1 + i) – n ] PV = 5000[1 – (1.02) – 80] = P198, 722.57
i i
b. t = 25 years n = 100
PV = Pmt [1 – (1 + i) – n ] PV = 5000[1 – (1.02) – 100] = P215, 491.76
i i
c. t = 50 years n = 200
–n
PV = Pmt [1 – (1 + i) ] PV = 5000[1 – (1.02) – 80] = P245, 236.73
i i
 The comparison indicates that as the length of the term of an annuity increases, its
present value gets closer to the present value of perpetuity.
PVO = Pmt PVO = 5000 ÷ (0.02) = P250, 000
i

References: https://www.myaccountingcourse.com/accounting-dictionary/perpetuity
https://xplaind.com/948526/present-value-of-perpetuity
https://www.readyratios.com/reference/analysis/perpetuity.html
CERVILLON, CARMELITA C., et. al. Mathematics of Investment – A Worktext. Philippine
Copyright 2003, Reprinted 2009.
MALABORBOR, PASTOR B., et. al. Mathematics of Investment by Scientific Calculator.
Philippine Copyright, 2000, Reprinted 2006
BALLADA, WINIFRE LU and BALLADA, SUSAN, Investment Mathematics Made Easy.
2003Philippine Copyrigh