SIMPLE ANNUITY

Annuities
• People pay by installment such as in insurance
payments, major purchases like appliances and property,
or loan payments.
• Payments by installment are done periodically and in
equal amounts. This payment scheme is called annuity.
 Definition of Terms
• Annuity - a sequence of payments made at equal (fixed) intervals or
periods of time
• Payment interval - the time between successive payments
Annuities may be classified in different ways as follows:
According to payment interval and interest period
• Simple Annuity - an annuity where the payment interval is the same
as the interest period
• General Annuity - an annuity where the payment interval is not the
same as the interest period
 Definition of Terms
According to time of payment
• Ordinary Annuity (or Annuity Immediate) - a type of annuity in which the
payments are made at the end of each payment interval
• Annuity Due - a type of annuity in which the payments are made at beginning
of each payment interval
According to duration
• Annuity Certain - an annuity in which payments begin and end at definite
times
• Contingent Annuity - an annuity in which the payments extend over an
indefinite or indeterminate length of time
 Definition of Terms
• Term of an annuity (t) - time between the first payment
interval and last payment interval
• Regular or Periodic payment (R) - the amount of 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 value of all
the payments to be made during the entire term of an annuity
 Example of Simple
Annuity
Monthly payment is compounded
monthly.
FORMULAS
 A. Future value of a Simple Annuity
Example 1. Suppose Mrs. Santos would like to save ₱3,000 at
the end of each month, for six months, in a fund that gives 6%
compounded monthly. How much is the amount or future value
of her savings after 6 months?
Given: R = ₱3,000;
t = 6 months or 1/2 year;
r = 6% or 0.06;
m =12;
Find: F
 A. Future value of a Simple Annuity
Example 1. Suppose Mrs. Santos would like to save ₱3,000 at
the end of each month, for six months, in a fund that gives 6%
compounded monthly. How much is the amount or future value
of her savings after 6 months?
Given: R = ₱3,000;
t = 6 months or 1/2 year;
r = 6% or 0.06;
m =12;
Find: F
 Using the formula:

Given: R = ₱3,000,
m =12,
i (m) = 0.06,
t = 6 months ( 6/ 12 =
0.5 ),
Find: F
F = ₱18, 226.506
 Example 2. In order to save for her high school graduation,
Marie decided to save ₱200 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: R = ₱200;
t = 6 years;
r = 0.25% or 0.0025;
m = 12;
Find: F

F = ₱14,507.02
Example 3. Suppose Mrs. Remoto 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?
Example 4. In order to save for your high school
graduation, you decided to save P200 at the end of each
month. If the bank pays 0.3% compounded monthly,
how much will her money be at the end of 4 years?
PRESENT OF SIMPLE
ANNUITY
 Present value of a Simple Annuity
Example 3. (Recall the problem in Example 1) Suppose Mrs. Santos
would like to know the present value of her monthly deposit of
₱3,000 when interest is 6% compounded monthly. How much will
be the present value of her savings at the end of 6 months?
Given: R = ₱3,000;
t = 6 months or 1 /2 year;
i (m) or r = 6% or 0.06;
m =12;
Find: P
Using the formula:
 Present value of a Simple Annuity
Example 1. (Recall the problem in Example 1) Suppose Mrs. Santos
would like to know the present value of her monthly deposit of
₱3,000 when interest is 6% compounded monthly. How much will
be the present value of her savings at the end of 6 months?
Given: R = ₱3,000;
t = 6 months or 1 /2 year;
i (m) or r = 6% or 0.06;
m =12;
Find: P
 Present value of a Simple Annuity
Example 2. Suppose Mrs. Remoto 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 at the end of 6 months?

Given: R = ₱3,000;
t = 6 months or 1 /2 year;
i (m) or r = 6% or 0.06;
m =12;
Find: P
GENERAL ANNUITY
 Example General
Annuity
Monthly installment payment a car,
lot, or house with an interest rate that
is compounded annually.
 Example of General
Annuity
Paying a debt semi-annually when
the interest compounded monthly.
 m1

Example 5. Mel started to deposit ₱1,000 monthly in a fund that

m2
pays 6% compounded quarterly. How much will be in the fund
after 15 years?
Example 5. Mel started to deposit ₱1,000 monthly in a fund that
pays 6% compounded quarterly. How much will be in the fund
after 15 years?
 m1
Example 6. A teacher saves P5,000 every 6 months in a bank that
m2
pays 0.25% compounded monthly. How much will be her
savings after 10 years.
Example 6. A teacher saves P5,000 every 6 months in a bank that
pays 0.25% compounded monthly. How much will be her
savings after 10 years.
 Example 7. BDO m2
bank pays interest at the rate of 2%
compounded quarterly. How much will have in them1bank at the
end of 5 years if he deposits P3,000 every month?
 Example 7. BDO bank pays interest at the rate of 2%
compounded quarterly. How much will have in the bank at the
end of 5 years if he deposits P3,000 every month?
 Present Value (P) in General Annuity

Where: R = Regular payments

n = total no. of payments
j= equivalent rate (j) per conversion period
Example 1: Ken borrowed an amount of money fromm1Kat. He agrees to
pay the principal plus interest by paying P38,973.76 each year for 3 years.
How much money did he borrow if interest is 8% compounded quarterly?
m2
Example 1: Ken borrowed an amount of money from Kat. He agrees to
pay the principal plus interest by paying P38,973.76 each year for 3 years.
How much money did he borrow if interest is 8% compounded quarterly?
Example 2: Mrs. Cruz, would like to buy a television(TV) set payable for 6
months starting
m1
at the end of the month. How much is the cost of the TV set
if her monthly
m2
payment is P3,000 and interest is 9% compounded semi-
annually.
Example 2: Mrs. Cruz, would like to buy a television(TV) set payable for 6
months starting at the end of the month. How much is the cost of the TV set
if her monthly payment is P3,000 and interest is 9% compounded semi-
annually.
Example 3: A sala set is for sale at P16,000 in cash
or on monthly installment P2,950 for 6 months at
12% compounded semi-annually. Which is lower:
cash price or the present value of the installment
term?
 Direction: Answer the following as indicated. Write your
answers on separate sheet/s of paper.

1. A television (TV) set is for sale at ₱13,499 in cash or on installment

terms, ₱2,500 each month for the next 6 months at 9% compounded
monthly. If you were the buyer, what would you prefer, cash or
installment? Why?
2. On a girl's 10th birthday, her father started to deposit ₱5,000 quarterly
at the end of each term in a fund that pays 1% compounded monthly.
How much will be in the fund on his daughter’s 17th birthday? (use j =
0.002502, n=28)