Simple Annuity

Annuity is a sequence of payments made at equal (fixed) intervals or periods of time. Annuities may be
classified in different ways, as follows:

According to payment interval
and interest period
According to time of payment
According to duration
Annuities
General Annuity is an annuity
Simple Annuity is an annuity
where the payment interval is the where the payment interval is
NOT the same as the interest
same as the interest period. period.
Ordinary Annuity (or Annuity Annuity Due is an annuity in which
Immediate) is an annuity in which the payments are made at the
the payments are made at the beginning of each payment
end of each payment interval. interval.
Contingent Annuity is an annuity
Annuity Certain is an annuity in in which the payments extend
which payments begin and end at over an indefinite (or
definite times. indeterminate) length of time.

Term of an annuity (t) is the time between the first payment interval and last payment interval.
Regular or Periodic payment (R) is the amount of each payment.
Amount (Future Value) of an annuity (F) is the sum of future values of all the payments to be made during
the entire term of the annuity.
Present value of an annuity (P) is the sum of present values of all the payments to be made during the entire
term of the annuity.
Sinking fund is any account that is established for accumulating funds to meet future obligations or debts.
Amortizing (mort means “death” you have “killed” the loan) a debt means that the debt is retired in a given
length of time by equal periodic payments that include compound interest.

Future Value of an Annuity

1. Suppose Joanna would like to save 3,000 pesos every month in a fund that gives 9% compounded monthly.
How much is the amount or future value of her savings after 6 months?
2. In order to save for her high school graduation, Missy decided to save 200 pesos 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?
3. Marie started to deposit 2,000 pesos quarterly in a fund that pays 5.5% compounded quarterly. How
much will be in the fund after 6 years?
4. Abigail would like to save 500,000 pesos for his son’s college education. How much should he deposit in a
savings account every 6 months for 12 years if interest is at 1% compounded semi-annually?
5. Find the future value F of the following ordinary annuities:
a. Monthly payments of 3,000 for 4 years with interest rate of 3% compounded monthly
b. Quarterly payment of 5,000 pesos for 10 years with interest rate of 2% compounded quarterly
c. Semi-annual payments of 12,500 pesos with interest rate of 10.5% compounded semi-annually for 6
years
d. Annual payments of 105,000 pesos with interest rate of 12% compounded annually for 5 years
e. Daily payments of 20 pesos for 30 days with interest rate of 20% compounded daily for 1 month
6. Suppose the parents of a newborn child decide that on each of the child’s birthdays up to the 17th year,
they will deposit in an account that pays 6% compounded annually. The money is to be used for college
expenses. What should the annual deposit be in order for the amount in the account to be 80,000 pesos
after the 17th deposit?
7. A company estimates that it will have to replace a piece of equipment at a cost of 800,000 pesos in 5
years. To have this money available in 5 years, a sinking fund is established by making equal monthly
payments into an account paying 6.6% compounded monthly. (a) How much should each payment be? (b)
How much interest is earned during the last year?
8. Amaia deposits 2,000 pesos annually into a retirement fund that earns 6.85% compounded annually. (The
interest earned by the retirement fund is tax free.) Due to a change in employment, these deposits stop
after 10 years, but the account continues to earn interest until Euler retires 25 years after the last
deposit was made. How much is in the account when Euler retires?
9. A person makes monthly deposits of 100 pesos into an ordinary annuity. After 30 years, the annuity is
worth 160,000 pesos. What annual rate compounded monthly has this annuity earned during this 30-year
period? Express the answer as a percentage, correct to two decimal places.
10. Alfonso started to deposit 18,000 pesos semi-annually in a fund that pays 5% compounded semi-annually.
How much will be in the fund after 10 years?
Present Value of an Annuity
1. How much should you deposit in an account paying 6% compounded semiannually in order to be able to
withdraw 1,000 pesos every 6 months for the next 3 years? (After the last payment is made, no money is
to be left in the account.)
2. What is the present value of an annuity that pays 200 pesos per month for 5 years if money is worth 6%
compounded monthly?
3. Solar Life offered an ordinary annuity that earned 6.5% compounded annually. A person plans to make
equal annual deposits into this account for 25 years and then make 20 equal annual withdrawals of
25,000 pesos, reducing the balance in the account to zero. How much must be deposited annually to
accumulate sufficient funds to provide for these payments? How much total interest is earned during
this entire 45-year process?
4. Assume that you buy a TV for 80,000 pesos and agree to pay for it in 18 equal monthly payments at 1.5%
interest per month on the unpaid balance. (a) How much are your payments? (b) How much interest will
you pay?
5. If you borrow 5,000 pesos that you agree to repay in six equal monthly payments at 1% interest per
month on the unpaid balance, how much of each monthly payment is used for interest and how much is
used to reduce the unpaid balance? (Amortization schedule)
6. A family purchased a home 10 years ago for 80,000 dollars. The home was financed by paying 20% down
and signing a 30-year mortgage at 9% on the unpaid balance. The net market value of the house (amount
received after subtracting all costs involved in selling the house) is now 120,000 dollars, and the family
wishes to sell the house. How much equity (to the nearest dollar) does the family have in the house now
after making 120 monthly payments? [Equity = (current net market value) – (unpaid balance).]
7. You have negotiated a price of 25,200 dollars for a new Tesla Model 3. Now you must choose between 0%
financing for 48 months or a 3,000-dollar rebate. If you choose the rebate, you can obtain a credit
union loan for the balance at 4.5% compounded monthly for 48 months. Which option should you choose?
8. Euler paid 200,000 pesos as down payment for a second hand Tesla Model S. The remaining amount is to
be settled by paying 16,200 pesos at the end of each month for 5 years. If interest is 10.5% compounded
monthly, what is the cash price of his car?
9. Gauss borrowed 100,000 pesos. He agrees to pay the principal plus interest by paying an equal amount of
money each year for 3 years. What should be his annual payment if interest is 8% compounded annually?
10. The buyer of a house and lot pays 200,000 pesos cash and 10,000 pesos every month for 20 years. If
money is 9% compounded monthly, how much is the cash value of the lot?