Topic: General Annuity

Learning Outcome(s): At the end of the lesson, the learner is able to find the future
and present values of general annuities and compute the periodic payment of a general
annuity, and calculate the fair market value of a cash flow stream that includes an
annuity.

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.
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.

Example 1. 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?

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Number of Decimal Places
When solving for an equivalent rate, say j = (1.015)1/3 – 1 in Example 1, six or more decimal
places will be used. If you use fewer or more decimal places, your answers may differ from the
answers provided in the text. You can ignore these discrepancies, but it is suggested that you
use at least six decimal places, or the exact value.

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A 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.
The fair market value or economic 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.

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The future of P50,000 at the end of the term is P63,814.08, which was already
determined earlier.
Fair Market Value = 900,509.40 + 63,814.08 = P964,323.48

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As expected, Mr. Ocampo’s offer still has a higher market value, even if the focal date
was chosen to be at the end of the term. The difference between the market values of
the two offers at the end of the term is.
1,063,814.08 –964,323.48 = P99,490.60.
You can also check that the present value of the difference is the same as the difference
computed when the focal date was the start of the term:
P = 99,490.60(1 + 0.05)-5 = P77,953.49.
Example 6. Which offer has a better market value?
Company A offers P150,000 at the end of 3 years plus P300,000 at the end of 5 years.
Company B offers P25,000 at the end of each quarter for the next 5 years. Assume that
money is worth 8% compounded annually.
Given:

Find: fair market value of each offer

Suppose that selected focal date is the start of the term. Since the focal date is the start
of the term, compute for the present value of each offer.

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Exercise
1. ABC Bank pays interest at the rate of 2% compounded quarterly. How much will
Ken have in the bank at the end of 5 years if he deposits P3,000 every month?
Given: R = 3,000
n = mt = (12)(5) = 60 payments
i(4) = 0.02
Find: F

2. A sala set is for sale at P16,000 in cash or on monthly installment of P2,950 for 6
months at 12% compounded semi-annually. Which is lower: the cash price or the
present value of the installment term?
Given: Cash price: P 16,000
R = 2,950
i(2) = 0.12
m = 12
n = (12)(0.5) = 6 monthly installment payments
Find: present value P
3. Monthly payments of 2,000 for 5 years with interest rate of 12%compounded
quarterly.

4. Quarterly payment of 15,000 for 10 years with interest rate of 8%compounded

5. Annual payment for the present value of P100,000 for 2 years with an interest rate
of 12% compounded semi-annually.

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Topic: Business and Consumer Loans
Learning Outcome(s): At the end of the lesson, the learner is able to illustrate business
and consumer loans, and distinguish between business and consumer loans.

Definition of Terms
Business Loan – money lent specifically for a business purpose. It may be used to start a
business or to have a business expansion.
Consumer Loan –money lent to an individual for personal or family purpose Collateral –
assets used to secure the loan. It may be real-estate or other investments
Term of the Loan – time to pay the entire loan
In Examples 1-5, identify whether the following is a consumer or business loan.
Example 1. Mr. Agustin plans to have a barbershop. He wants to borrow some money
from the bank in order for him to buy the equipment and furniture for the barbershop.
Solution. Business loan
Example 2. Mr and Mrs Craig wants to borrow money from the bank to finance the
college education of their son.
Solution. Consumer loan
Example 3. Mr. Alonzo wants to have some improvements on their 10-year old house.
He wants to build a new room for their 13-year old daughter. He will borrow some money
from the bank to finance this plan.
Solution. Consumer loan
Example 4. Mr. Samson owns a siomai food cart business. He wants to put another food
cart on a new mall in the other city. He decided to have a loan to establish the new
business.
Solution. Business loan
Example 5. Roan has a computer shop. She owns 6 computers. She decided to borrow
some money from the bank to buy 10 more computers.
Solution. Business loan

Exercise:
Identify the following whether the following illustrates a business loan or a consumer loan.
1. Mr. Lim wants to have another branch for his cellphone repair shop. He decided to apply for a loan
that he can use to pay for the rentals of the new branch.
2. Mr. Trillas runs a trucking business. He wants to buy three more trucks for expansion of his
business. He applied for a loan in a bank.
3. Mrs. Alonzo decided to take her family for a vacation. To cover the expenses, she decided to apply
for a loan.
4. Glenn decided to purchase a condominium unit near his workplace. He got a loan worth
P2,000,000.
5. Mr. Galang renovated her house forP80,000. This was made possible because of an approved
loan worth P75,000.

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Topic: Solving Problems on Business and Consumer Loans (Amortization
and Mortgage)

Learning Outcome(s): At the end of the lesson, the learner is able to solve
problems on business and consumer loans (amortization and mortgage). Lesson
Outline:

Definition of Terms
Amortization Method – method of paying a loan (principal and interest) on
installment basis, usually of equal amounts at regular intervals.

Mortgage – a loan, secured by a collateral, that the borrower is obliged to pay at

Chattel Mortgage – a mortgage on a movable property

Collateral – assets used to secure the loan. It may be a real-estate or other investments

Outstanding Balance – any remaining debt at a specified time

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Outstanding Balance
Recall that the outstanding balance of a loan is the amount of the loan at this time.

Note: In this case, the house itself is used as the mortgaged property. Also please take
note that the other way to solve this is to directly compute the mortgaged amount by
multiplying the cash value of the property by the percentage of the financed amount,
which in this case, 100%-20%=80%. Thus, the amount of the loan is given by
(0.80)(P3,000,000)= P2,400,000.

One method to compute the outstanding balance is to get the present value of all
remaining payments. This method is called the prospective method.

We use the symbol Bk to denote the outstanding balance after k payments. In other
books, pOBk is used (the “p” stands for “prospective”).

Example 5. Mrs. Se borrowed some money from a bank that offers an interest rate of
12% compounded monthly. His monthly amortization for 5 years is P11,122.22. How
much is the outstanding balance after the 12th payment?

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Example 6. Mr. and Mrs. Banal purchased a house and lot worth P4,000,000. They
paid a down payment of P800,000. They plan to amortize the loan of P3,200,000 by
paying monthly for 20 years. The interest rate is 12% convertible monthly.
(a) How much is the monthly payment?
(b) What is the total interest paid?
(c) What are the principal and interest components of the 51st payment?

Solution.

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The interest amount is P5,256,342.40

Note: You may be surprised to learn that much of what is being paid is for the interest.
This is particularly true if a loan is being paid over a long period of time.

Note: You may be surprised to learn that much of what is being paid is for the interest.
This is particularly true if a loan is being paid over a long period of time.

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Solved Examples
1. A loan of P300,000 is to be repaid in full after 2years. If the interest rate is
9%per annum. How much should be paid after 2 years?
Solution.
Given: P = P300,000 j =0.09 n = 2 Find F.

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Exercises

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