ANNUITIES

Lesson: Simple Annuity

ANNUITY

• Payment by installment are

done periodically and in
equal amounts.
• This payment scheme is
called annuity
Basic Annuities
üAn annuity is a series of equal periodic payments.
üA fixed sum of money paid to someone at a
regular intervals, subject to a fixed compound
interest rate

ANNUITY
Annuities can be Classified in Different Ways
ANNUITIES
According to Simple Annuity General Annuity
payment An annuity where the payment An annuity where the payment
interval and interval is the same as the interval is not the same as the
interest period interest period interest period
According to Ordinary Annuity or Annuity Annuity Due
the time of Immediate A type of annuity in which the
payment A type of annuity in which the payments are made at the
payments are made at the end of beginning of each payment
each payment interval interval
According to Annuity Certain Contingent Annuity
duration An annuity in which payments An annuity in which the payments
begin and end at definite times extends over an indefinite length
or fixed date of time

Classifications of Simple Annuity

Slide 6

1. Ordinary Annuity
– In ordinary annuity, the equal payments are
made at the end of each compounding period
starting from the first compounding period.

From the cash flow diagram shown above, the future amount F is the sum of payments starting
from the end of the first period to the end of the nth period. Observe that the total number of
payments is n and the total number of compounding periods is also n. Thus, in ordinary annuity,
the number of payments and the number of compounding periods are equal.
6-6
Classifications of Simple Annuity
Slide 7

2. Annuity Due
– In annuity due, the equal payments are made
at the beginning of each compounding period
starting from the first period. The diagram
below shows the cash flow in annuity due.

As indicated in the figure above, F1 is the sum of ordinary annuity of n payments. The future
amount F of annuity due at the end of nth period is one compounding period away from F1. In
symbol, F = F1(1 + i).
6-7

Classifications of Simple Annuity

Slide 8

3. Deferred Annuity
– In deferred annuity the first payment is
deferred a certain number of compounding
periods after the first. In the diagram below,
the first payment was made at the end of the
kth period and n number of payments was
made. The n payments form an ordinary
annuity as indicated in the figure.

6-8
 Classifications of Simple Annuity
Slide 9

4. Perpetuities
– Perpetuity is an annuity where the payment
period extends forever, which means that the
periodic payments continue indefinitely.

6-9

Lesson

SIMPLE ANNUITY

McGraw-Hill /Irwin © 2009 The McGraw-Hill Companies, Inc.

 Slide 11

Ordinary Annuity
An annuity with payments at the end of the
period is known as an ordinary annuity.

Today 1 2 3 4

₱10,000 ₱10,000 ₱10,000 ₱10,000

End of year 1
End of year 2
End of year 3
End of year 4

6-11

Annuity – a sequence of payments made at equal

(fixed) intervals or periods of time

Payment interval – the time between successive

payments

Term of an annuity, t – time between the first

payment interval and last payment interval
Definition
Regular or Periodic payment, R – the amount of
of Terms 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

Present Value of an annuity, P – sum of present

values of all the payments to be made during the
entire term of the annuity
EXAMPLE 1: Suppose Mrs. Ramos
would like to save P3,000 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?

SIMPLE ORDINARY ANNUITY

SIMPLE ORDINARY ANNUITY
EXAMPLE 1: Suppose Mrs. Ramos would like to save P3,000 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?

Given: Solution:
periodic payment R = P3,000
term t = 6 months 1+j (−1
F=R
interest rate per annum i("#) = 0.09 j
number of conversions per year m = 12
%.%'
interest rate per period j = "# = 0.0075 1 + 0.0075 ) − 1
F = 3000
0.0075
Find:
amount (future value) at the end of the term, F / = 01234. 15

SIMPLE ORDINARY ANNUITY

EXAMPLE 2: In order to save for her high school graduation, Marie
decided to save P2000 at the end of each month. If the bank pays
0.25% compounded monthly, how much will her money be at the
end of 6 years?

Given: Solution:
R = 2000
m = 12 1+j (−1
F=R
i("#) = 0.25% = 0.0025 j
%.%%#*
j = "# = 0.000208333
t = 6 years 1 + 0.000208333 +# − 1
F = 2000
n = mt = (12)(6)= 72 periods 0.000208333

Find: / = 038494. :4
amount (future value) at the end of
the term, F
EXAMPLE: Suppose Mrs. Ramos
would like to know the present
value of her monthly deposit of
P3,000 when interest is 9%
compounded monthly. How
much is the present value of her
savings after 6 months?

SIMPLE ORDINARY ANNUITY

SIMPLE ORDINARY ANNUITY
EXAMPLE 1: Suppose Mrs. Ramos would like to know the present
value of her monthly deposit of P3,000 when interest is 9%
compounded monthly. How much is the present value of her savings
after 6 months?

Given: Solution:
periodic payment R = P3,000
1− 1+j ,(
term t = 6 months
P=R
interest rate per annum i("#) = 0.09 j
number of conversions per year m = 12
%.%' ,)
interest rate per period j = "# = 0.0075 1 − 1 + 0.0075
P = 3000
0.0075
Find: Present value, P
< = 0982=. 95

SIMPLE ORDINARY ANNUITY

EXAMPLE 2: Mrs. Ramos 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 value of his car?
Solution:
Given: ,(
down payment, DP = 200,000 1− 1+j
P=R
periodic payment, R = P16,200 j
term, t = 5 years ,)%
1 − 1 + 0.00875
interest rate per annum, i("#) = 0.105 P = 16,200
number of conversions per year, m = 12 0.00875
%."%*
interest rate per period, j = "# = 0.00875 0.4070922376
P = 16,200
n = mt = (12)(5)= 60 periods 0.00875
P = 16,200(46.52482716)
Find: Cash Value
P = 753,702.20
Cash Value = DP + P
= 200,000+ 753,702.20
Cash Value = P953,702.20
SIMPLE
ORDINARY
ANNUITY

SIMPLE ORDINARY ANNUITY

EXAMPLE: A certain fund currently has P100,000 and is invested at
3% interest compounded annually. How much withdrawal can be
made at the end of each year so that the fund will have zero balance
at the end of 12 years?
Solution:
Given: 1− 1+j ,(
present value, P = P100,000 P=R
j
term t = 12 years
interest rate per annum i(") = 0.03 1 − 1 + 0.03 ,"#
number of conversions per year m = 1 100,000 = R
%.%-
0.03
interest rate per period j = " = 0.03
0.2986201198
n = mt = (1)(12)= 12 periods 100,000 = R
0.03
Find: Periodic payment, R 100,000 = R (9.954003994)
100,000
R=
9.954003994
D = 04, 43=. :0
END OF
PRESENTATION
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