Annuities

Lesson 2.1:
Ordinary Simple
Annuity
Prepared by Pacita L. Lestojas

General Mathematics
RECALL: Simple Annuity vs. General
Annuity
Simple Annuity
 Interest period is the same as the
payment interval (for example, monthly
payments on a loan for which the interest is
compounded monthly)
General Annuity
 Interest period is not the same as the
payment interval (for example, monthly
payments on a loan for which the interest is
RECALL: Ordinary Annuity vs. Annuity
Due
Ordinary Annuity
 payments are made at the end of
each payment period
Annuity Due
 payments are made at the
beginning of each payment
period
Future Value vs. Present Value
Future Value (F)
 the accumulation of the payments and
interest earned
Present Value (P)
 a single lump-sum deposit that results
in the same future value as making
regular payments for a specific amount
of time
 the principal amount that must be
invested today to provide the regular
Understanding Future Value in Real Life
Imagine you have a grandson and you commit
to help pay for his college education. Hence, at
the birth of your grandson, you set up an
educational plan and make deposits of ₱6,000
at the end of each 6 months into an account
for 17 years. Each deposit is compounded
semi-annually at 6% interest rate. After 17
years, you received a total of ₱346,381. This
amount is what we call the future value.
Understanding Present Value in Real Life
Still related to the previous situation: Instead of
making deposits of ₱6,000 at the end of each 6
months into an account for 17 years, you decided to
make a single lump-sum deposit or one-time deposit
of ₱126,791 compounded semi-annually at 6%
interest rate because you did not want to go to the
bank from time to time. After 17 years, you still
received the same amount of ₱346,381. This one-
time payment/deposit (₱126,791) that results in
the same future value as making regular payments
of ₱6,000 is what we call as the present value.
RECALL: Compounding Period and
Frequency of Conversion

Frequency of
Compounding Period
conversion,
Annually (once a year) 1
Semi-annually (every 6 months) 2
Quarterly (every 3 months) 4
Monthly (every month) 12
Daily (everyday) 365
 Ordinary Simple Annuity: Future Value

[ (𝟏 )
]
𝒎𝒕
𝒓
+ − 𝟏
𝒎
𝑭 = 𝑹
𝒓
𝒎

where:
 Ordinary Simple Annuity: Present
Value
[ (𝟏 )
]
− 𝒎𝒕
𝒓
𝟏 − +
𝒎
= 𝑹
𝒓
𝒎

where:
Strategy in Solving Ordinary Simple Annuity
1. Read the problem carefully and check if it is an ordinary simple annuity
Problems
problem. It must satisfy the following conditions:
• Equal payments at a regular interval (annuity). If it is just a one-
time payment, then it is an interest problem, not an annuity problem.
• Payments are made at the end of each payment period
(ordinary annuity). Look for keywords such as “payments are made
at the end of each quarter,” “payments are made at the end of each
year,” etc. If it is stated that payments are made “at the beginning” of
a quarter or year, then it is an annuity due, not an ordinary annuity.
Annuity due is not covered in this lesson.
• Interest period is the same as the payment interval (simple
annuity). If they are not the same, then it is a general annuity, not a
simple annuity. General annuity will be discussed in the next lesson.

Once all these conditions are met, you can now proceed to answering the
problem using the ordinary simple annuity formulas.
Strategy in Solving Ordinary Simple Annuity
2. Follow the Given-Required-Solution format.
Problems
3. Write the given numerical data. Identify the present value (P), future value (F),
periodic payment (R), rate (r), frequency of conversion (m), time (t) in years, and
other data. Rates, given as a percentage (%), must be converted to decimal. To write
a percentage as a decimal, move two decimal places to the left and drop the % sign.
4. Identify the required value.
5. In writing the solution, write the formula for the required value. Then, substitute the
given data.
6. During the calculations, avoid rounding off too much so that you will end up with the
most accurate value at the end of the calculation. In case you encounter a non-
terminating decimal (“endless decimal”) during the calculation, round off the value
to at least four decimal places. Much better if you copy all digits appeared on the
calculator.
•Example:
For terminating decimals (“decimals that has an end”), copy all the digits that
6. appearthe
In writing on final
your answer:
calculator. Examples:
• For non-terminating decimals, round off your answer to the nearest
hundredths (two decimal places).
Example Problem 1
Calculate the accumulated value of quarterly payments
of ₱5,000 made at the end of each quarter for 10 years
just after the payment has been made if interest is 8%
compounded quarterly.
Checking the conditions:
• Since equal payments (₱5,000) are made at a regular interval
(quarterly), then it is an annuity problem.
• Since payments are made at the end of each quarter, then it is an
ordinary annuity.
• Since the payment interval (quarterly) is the same as the interest
period (“compounded quarterly”), then it is a simple annuity
problem.
• Since the problem asked for the accumulated value, we are
going to calculate the future value.
Example Problem 1
Calculate the accumulated value of quarterly payments
of ₱5,000 made at the end of each quarter for 10 years
just after the payment has been made if interest is 8%
compounded quarterly.
Given: Solution:

Required:
Example Problem 1
Calculate the accumulated value of quarterly payments
of ₱5,000 made at the end of each quarter for 10 years
just after the payment has been made if interest is 8%
compounded quarterly.
Example Problem 2
Calculate the present value of five payments of ₱3,000
made at the end of each of five consecutive years if
money is worth 6% compounded annually.

Checking the conditions:

• Is it an annuity problem?YES
• Is it an ordinary annuity problem?
YES
• Is it a simple annuity problem?
YES
Example Problem 2
Calculate the present value of five payments of ₱3,000
made at the end of each of five consecutive years if
money is worth 6% compounded annually.

Given: Solution:

Required:
Example Problem 2
Calculate the present value of five payments of ₱3,000
made at the end of each of five consecutive years if
money is worth 6% compounded annually.