Lesson 7 Annuities

CONTEXT
Pre-Assessment
Directions: Below are definitions of annuities and types of annuities. Encircle the letter of the BEST
answer for each item. Each item is equivalent to 1 point.
1 Which of the following is the type of annuity where the payments occur in the end
. of the period?

  a Ordinary Annuity b. Mountain Due

  c. Extraordinary Annuity d. Annuity Due
 
2 Which of the following is the types of annuity where the payments occur in the
. beginning of the period?

  a Ordinary Annuity b. Mountain Due

  c. Extraordinary Annuity d. Annuity Due
 
3 Which of the following is an annuity where the number of compounding periods is
. equal to the number of payments periods?

  a. Deferred Annuity b. General Annuity

  c. Simple Annuity d. Colonel Annuity
 
4 Which of the following is an annuity where the number of compounding period is
. NOT EQUAL to the numbers of payments periods?

  a. Deferred Annuity b. General Annuity

  c. Simple Annuity d. Colonel Annuity
 
5 Which of the following is an annuity which does not begin until a given time
. interval has passed?

  a. Deferred Annuity b. General Annuity

  c. Simple Annuity d. Colonel Annuity

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Learning Competencies

At the end of the lesson, the learners can:

 illustrate simple and general annuities by:
 identifying unique characteristics of simple and general annuities
 citing examples for each type of annuities
 distinguish between simple and general annuities by:
 describing unique features simple and general annuities
 identifying similarities and differences of each type of annuity
 find the future value and present value of both simple and general annuities by:
 identifying the known and unknown variables in the given
 determining the general formula of future and present value
 applying the formula/rules
 calculate the fair market value of a cash flow stream that includes an annuity
by:
 determining the unknown and unknown variables in the given situation
 identifying the appropriate formula to be used
 performing the steps in solving fair market value
 calculate the present value and period of deferral of a deferred annuity by:
 determining the unknown and unknown variables in the given situation
 identifying the appropriate formula to be used
 performing the steps in solving the present value and period of deferral

Values Integration: Competence and Character

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 EXPERIENCE
Prelection
Activity 7.1
Directions: Answer the following questions:

a) Have you ever experienced borrowing money from someone, and you cannot repay it
in full?
______________________________________________________________________
______________________________________________________________________

If yes, how did you resolve this problem? If no, what would you do if you were in that
position?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

b) If the places have been switched, and you are be the lender, would you agree to what
you answered in the 2nd question? Why?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

The process of paying a debt by series of payments or saving money by series of deposits is
what we call annuity.

Concept Notes
Definition
ANNUTIES

An annuity is a series of equal payments at regular intervals. Clearly, a significant

portion of both personal and business expenditures and receipts form an annuity. The
significance of annuities warrants a careful coverage of the theory and applications of
annuities.

Annuity can be classified based on payments terms, payment schedule, and interest
period and payment interval.

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 Concept Notes

Below are classifications of Annuity:

An annuity
salaries
stocks dividends
that is paid
at the end
Ordinary
of the time
period
Annuity
An annuity
that is paid
Annuity at the rental
beginning Insurance plans
Due of the time
period
An annuity
in which the
SSS and
PAG-IBIG
first
payment is
Deferred
Salary Loans delayed for
a time
Annuity
period

Figure 7.1 Classification of Annuity Based on Payment Schedule

Simple Annuity
• An annuity in which the number of
compounding period per year coincides with
the number of annuity payments per year.

General Annuity
• An annuity in which the annuity payments and
compounding period DO NOT coincide.
Figure 7.2 Classification of Annuity Based on Interest Period and Payment Interval

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 Concept Notes

Definition

FUTURE VALUE OF AN ANNUITY

 
Future Value of an Annuity is the sum of all payments made and the compound
interest accumulated for each payment or investment.
Formula of Future Value of Annuities:
or
where,
FV = future value of an ordinary annuity
A = payment or savings made every period
= the rate of interest
= the number of payments/ compounding period in a year
= time in years
Note: for general annuity
where,
= the equivalent interest rate per payment interval
= the rate of interest
= the number of compounding period in a year
= the number of deposits / investment / payment in a year

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 Concept Notes
Future Value of Simple Annuities
Example 7.1
Leonard would like to deposit P1000 at the end of each year in his new savings account. Its interest rate is
 
5% compounding annually. How much money would Leonard have at the end of 3 years?

Solution
Each deposit will mature over time at its own rate; hence, we need to find the future value of each deposit
by using the formula of compounding interest.

Using the Future Value factor of 1.05, we have

Year Savings Future value factor Future values

1 1000 1,102.50
2 1000 1,050.00
3 1000 1000.00
st       3152.50
Since in the 1 deposit will be at the end of the year, the interest will be applied the next year. Hence, the
interest will be applied twice for 1st deposit, once for the 2nd deposit and the last will have no interest
apply.

Therefore, Leonard will have P3,170.50 at the end of the 3 years.

 Now, Using the formula we have

,,

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 Concept Notes
Future Value of General Annuities
Example 7.2

Leonard would like to deposit P1000 at the end of each month in his new savings account. Its interest
 
rate is 5% compounding quarterly. How much accumulated money would Leonard have at the end of
3 years?

Solution
For general annuities, the number of compounding period is not equal to the number of deposits or
payment, hence we need to find by using the formula,

where,
= the equivalent interest rate per payment interval
= the rate of interest
= the number of compounding period in a year
= the number of deposits / investment / payment in a year
 
Solving for we have,

To find the accumulated money we now use the formula for Future value of annuities, where, is the
number of payments in a year.

Hence, Leonard will have P12,274.3 at the end of 3 years.

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 Concept Notes

Definition
PRESENT VALUE OF AN ANNUITY
 
Present Value of an Annuity refers to the current value of all income that will be generated by that
investment in the future. It is the amount of money that would need to be invested today to generate a
specific income down the road.

Formula of Present Value of an Annuities

Where,
= present value of an annuity
= value of each payment or savings
= rate of interest
= number of payment / compounding periods in a year
= time in a year

Present Value of Simple Annuity

Example 7.3
Sherlock a senior citizen, apply for a retirement plan. He chooses a retirement plan that offers 5%
interest compounding quarterly. If he wants to receive P10,000 at the end of each quarter for the next
5 years. How much should Sherlock invest now to receive his desired amount?
Solution
 
We can find the amount that Sherlock needs to invests, by finding the present value of the retirement
plan. Using the formula, we have,

Given:

Therefore, Sherlock must deposit

P175,993.16 if he wants to
receive P10,000 every 3 month
for the next 5 years.

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 Concept Notes
Present Value of General
Example 7.4 Annuity

Sherlock a senior citizen, apply for a retirement plan. He chooses a retirement plan that offers 5% interest
 
compounding semi-annually. If he wants receive P10,000 at the end of each quarter for the next 5 years.
How much should Sherlock invest now to receive his desired amount?

Solution
Just like in the future value of General annuities, to solve for the present value of a general annuity. First,
we need to find the equivalent interest rate per payment interval (),

Solving for ,
Given:

Now, using the present value of an annuity formula,

Given:

Therefore, Sherlock must invest P176,128.60 in the retirement plan for him to receive P10,000 at the end
of each quarter for the next 5 years.

Definition

DEFERRED ANNUITY
An annuity that does not begin until a given time interval has passed. Period of
Deferral is the time between the purchase of an annuity and the start of the payments
for the deferral annuity

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 Concept Notes
Guided Practice 1

Directions: Practice plus never giving up is one of the recipes to success. Now, practice your skills and
enhance your knowledge by answering the following problem. Read each problem carefully. Solve it and
show your complete solution. Each item is equivalent to 5 points.

1. Joker has decided to put P3,500 at the end of each year into an insurance plan over his
40-years working life and retire. How much will Joker have if the account will earn 10%
compounded annually?
Solution

2. What if the account of Joker will earn 10% interest compounded semi-annually? How
much money will he have on his retirement?
Solution

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 Concept Notes
Guided Practice 1 Continuation…

3. An obligation of P50,000 will be settled by 60 equal payments, with the first payment to
be at the end of the month. What is the monthly payment if the interest charged is 9%
compounded monthly?
Solution

4. General Mathias wants to give his son a savings account as a gift. The bank interest rate
for a savings account is 12% compounded quarterly. If his son will withdraw P10,000
monthly for the next 2 years. How much should Gen. Mathias deposit now to ensure that his
son will have money each month?
Solution

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 REFLECTION

Question A

Allowances are part of every student’s happiness. During this time of online learning, where did you
mostly spend your regular school allowances?

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________

Question B
After finding out where all your monetary allowances go, you’ve challenged yourself to be disciplined
from any unnecessary spending for this school year, in what way/s can you achieve your goal?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________

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 ACTION
Independent Work
Activity 7.2: Safe to save (15 points)
Directions: During this pandemic, all students will stay at home. All school works will be done at your
homes. It means that your allowances will remain untouched. Using your output on lesson 1, assume
that you will save your monthly allowances on your recommended bank. Calculate the savings that you
will gain after the end of this school year (8 months). If you continuously deposit the same amount of
money throughout the school year. After finding how much will you have, what will you do to your
savings? Where will you spend it?

Note: For having daily allowance, solve using the given format below to determine your monthly
 
allowance.

Allowance per day 20 days = ____________ pesos

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 EVALUATION
Test A. Problem Solving: Annuities (40 points)
 Directions: Problems about annuity allows you to demonstrate your knowledge on loans and investment.
Read, comprehend, and solve completely each problem. Show your complete solution.

Complete solution – 5 pts Correct answer – 2 Conclusion – 1pt

1. Determine the present value on July 7 of paid at the end of each subsequent calendar quarter for 7
years if money is worth 6% compounded quarterly.

2. How much must be deposited now in a bank paying 9% compounded monthly if it is desired that a
monthly withdrawal of can be made for 5 years?

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 EVALUATION
Test A. Problem Solving: Annuities Continuation
 
3. Lazarus bought a rolling store and agreed to pay of each month for 1 year. What is the equivalent
cash price of the rolling store if the interest rate is 12% compounded semiannually?

4. For a low cost house and lot, Mrs. Bolanos paid in cash and agreed to pay at the end of each
month for a period of 10 years. If money is worth 6 compounded monthly, what is the equivalent
cash price of the house and lot?

5. If an individual was asked to make equal payments of at the end of each half-year for 4 years, how
much was his debt at the beginning of the term? Suppose the money borrowed is worth 10.5%
compounded semi-annually?

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