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    Annuities

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    SENIOR HIGH SCHOOL General Mathematics Quarter 2 —- Module 7 Department of Education * Republic of the Philippines General Mathematics — Grade 11 Alternative Delivery Mode Quarter 2- Module 7: Annuities Republic Act 8293, section 176 states that: ‘No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shalll be necessary for exploitation of such work for profit. Such agency or office may, among cther things, impose as a condition, payment of royalties. Borrowed materials included in this module are owned by the respective copyright holders. Effort has been exerted to locate and seek permission to use these materials from the respective copyright owners. The publisher and author do not represent nor claim ownership over them, Published by the Department of Education Secretary: Undersecretary Assistant Secretary: Development Team of the Module Authors: Angelie D. Enterina Editor Reviewers: llustrator: Layout Artist: Management Team: Printed in the Philippines by Department of Education — Bureau of Learning Resources (DepEd — BLR) Office Address: Telefay E-mail Address: R HIGH SCHOOL General Mathematics Quarter 2 - Module 7: Annuities This instructional material was collaboratively developed and reviewed by educators from public and private schools, colleges, and or/universities. We encourage teachers and other education stakeholders to email their feedback, comments, and recommendations to the Department of Education at action@deped.gov.ph. We value your feedback and recommendations. Department of Education ® Republic of the Philippines Simple Annuity Se. (BA) otc to tao At the end of the lesson, the learner will be able to: ¥ Illustrate simple and general annuities ¥ Distinguish between simple and general annuities ¥ Computes the future value, present value and periodic payment of simple annuity (4) \@) What I know... Direction: Choose the letter of the correct answer and write on the separate sheet of paper. PRE-TEST 1. It is an annuity where the payment interval is the same as the interest period a.) Simple Annuity b. General Annuity c.) Annuity Certain d.) Contingent annuity 2. It is a sequence of payments made at equal (fixed) intervals or periods of time. a.) Future Value of an annuity b.) Present Value of an annuity c.) Annuity a.) Periodic Payment 3. The sum of future values of all the payments to be made during the entire term of annuity a.) Annuity b.) Present Value of an annuity c.) Future Value of an annuity d.) Periodic Payment 4. The sum of all present values of all the payments to be made during the entire term of the annuity. a.) Periodic Payment b.) Time of an Annuity c.) Future Value of an annuity d.) Present Value of an annuity 5. Find the future value of an ordinary annuity with a regular payment of P1,000 AT 5% interest rate compounded quarterly for 3 years a.) P12,806.63 b,) P12,860.36 c.) P12,860.63 d.) P12,806.36 6. Find the present value of an ordinary annuity with regular quarterly payments worth P1,000 at 3% annual interest rate compounded quarterly at the end of 4 years. a.) P15,024.31 b.) P15,204.31 c.) P15,402.31 d.) P15,420.31 7. Ivis a term that refers to payments received (cash inflow). a.) General Annuity b.) General Ordinary Annuity c.) Cash Flow d,) Annuity Certain 8. It is refers to a single amount that is equivalent to the value of the payment stream that shalll date. a,) Future Value of a general annuity b.] Present Value of a general annuity c.) Fair market value d.) Periodic Payment 9, What is the other term for fair market value? a.) Cash flow b.] Present Value of a general annuity c.) Future Value of a general annuity d.) Economic Value 10. A teacher saves P5,000 every 6 months in the bank that pays 0.25% compounded monthly. How much will be her savings after 10 years? a.) P101,197.06 b.) P101,179.06 c.) P101,971.06 4.) P101,791.06 11. It is an annuity that does not begin until a given time interval has passed. a.) Period of Deferral b.) Deferred Annuity c.) Present value of a deferred annuity d.) Contingent annuity 12. It is a time between the purchase of an annuity and the start of the payments for the deferred annuity. a.) Period of deferral b.) General Ordinary Annuity c.) Deferred annuity 4d.) Present value of a deferred annuity 13. Melvin availed of a loan from a bank that gave him an option to pay P20,000 monthly for 2 years . The first payment is due after 4 months. How much is the present value of the loan if the interest rate is 10% converted monthly? e.) P422,795.78 £) P422,759.78 g.) P422,579.78 h.) P422,597.78 14. Annual payments of P2,500 for 24 years that will start 12 years from now. What is the period of deferral in the deferred annuity? e.) 12 periods £) 10 periods g.) 11 periods h.) 13 periods 15. Semi-annual payments of P6,000 for 13 years that will start 4 years from now. What is the period of deferral in the deferred annuity? e.) 8 semi-annual intervals £) 6 semi-annual intervals g.) 5 semi-annual intervals h.)7 semi-annual intervals What's in... REVIEW You use money in everyday life. In order to buy what you need, you do transactions involving money. In the previous lessons, you learned the methods of solving the value of money under compound and simple interest environment. You have learned to illustrate and distinguish between simple and compound. You also learned how to compute for the interest, present value and future value in a simple and compound interest environment. As well as solve problems involving real life situations of simple and compound interest. DQ) mero ~S Ma’am Angel wants to start a business with an initial capital of P100,000. She decided to put up a fund with deposits made at the end of each month, If she wants to gain the initial capital after 4 years, how much monthly deposit must be made? In most cases where house or cars are purchased, a series of payments is needed at certain points in time. Such Transaction is called ANNUITY. a An ANNUITY is a sequence of equal payments (or deposits) made at a regular interval of time. ‘Simple Annuity - an General Annuity - an According to annuity where the annuity where the payment interval | payment interval is the | payment interval is not the and interest period | same as the interest same as the interest period period Ordinary Annuity (Annuity Immediate) — a type of AsHonding 1o'UmEOr | — ratty in whicli the payments Gre made wt fhe end, Daymiene of each payment interval ‘According to ‘Anauity Certain an annuity in which payments duration begin and end at definite times. [@termofananmite] ‘The time between the first payment interval and the last payment interval. ‘The amount of each payment. ‘The sum of future value of all the payments to be made during the entire term of the annuity. The sum of present value of all the payments to be made during the entire term of the annuity. Annuities may be illustrated using a time diagram. The time diagram for an ordinary annuity (i.e., payments are made at the end of the year] is given below. EE Suppose Mrs. Manda would like to deposit P3,000 every month in a fund that gives 9%, compounded monthly. How much is the amount of future value of her savings after 6 months? Given: Periodic payment (R) = P3,000 ‘Term (t) = 6 months Interest rate per annum (annually) (i) = 0.09/9% Number of conversion per year (m) = 12 t 0.09 Interest rate per period j = "a" 0.0075 (1) Illustrate the cash flow in time diagram and Find the future value of all the payments at the end of term (t=6). Time ° 1 2 3 4 5 6 (in months) Payment/ Deposit 3,000 3,000 3,000 3,000 3,000 (2) Add all the future values obtained from the cash flow. 3,000 = 3,000 3,000 (1 + 0.0075) = 3,022.50 3,000 (1 + 0.0075) 2 = 3,045.17 3,000 (1 + 0.0075) * = 3,068.01 3,000 (1 + 0.0075) + = 3,091.02 3,000 (1 + 0.0075) § = 3,114.20 ‘Thus, the amount of this annuity is P18,340.89 / FORMULA 1: FUTURE VALUE »~ { a. The future value of an ordinary annuity with regular payments R at a nominal interest rate | compounded m times a year after t years is ena) mp OF = R(t Note: j = 7 n=mt {3) Solution using formula 1 Given: A(t)=? R=3,000 i=0.09 m=12 — t (annually) = 6/12 0.09)12(0.5) = 3,000 Qa) 12 = (1+ 0.0075)6— = 3,000 0.0075 | _ (1.0075)°- ~ 3,000 0.0075 | = 3,000 [pessesees +) , 0.0075 _ 0.458522351 - 3,000 [ 0.0075 | = 3,000 ( 6.113631347) F = 18, 340.89 ‘Therefore, the amount of future value of Mrs. Manda’s savings after 6 months is P18,340.89 Thus, using different kinds of processes in finding the future value of an ordinary annuity comes up with the same answer. To start a business, Jake wants to save a certain amount of money at the end of every month to put in an account providing 2% interest compounded monthly. His estimated start-up capital is P150,000. If he wants to start a business in 1.5 years, how much monthly deposit must he put into the account? SOLUTION: Since the deposits are made at the end of every month, then this Is an example of an ordinary annuity, Use FORMULA I with: GIVEN: i=0.02, m= 12, t= 1.5, and A= P150,000. ran 150,000 fe “=| (a+ 0001666)1°-1 150,000 = 2 Ere | =p [(-001666)"*=1 150,000 = k [%2866—4] 1.030428001—1 150,000 = 8 ( ETorees | 150,000 = eee Pe 150,000 18.2572809 ns 0.001666 8,215.90 = R Thus, Jake must deposit P8,215.90 at the end of cach month. Suppose Mrs. Manda would like to deposit P3,000 every month in a fund that gives 9%, compounded monthly. How much is the amount of future value of her savings after 6 months? Given: Periodic payment (R) = P3,000 ‘Term (t) = 6 months Interest rate per annum (annually) o 5.007% Number of conversion per year (m) = i Lie Interest rate per period j = => = 0.0075 (1) Illustrate the cash flow in time diagram and Find the Present value of all the payments at the end of term (t=6). Time ° 1 2 3 4 5 6 (in months) Payment/ Deposit 3,000 3,000 3,000 3,000 3,000 3,000 (2) Add all the present values obtained from the cash flow. 3,000 (1 + 0.0075) 7 = 2,977.667 3,000 (1 + 0.0075) 2 = 2,955,501 3,000 (1 + 0.0075) * = 2,933.50 3,000 (1 + 0.0075) + 3,000 (1 + 0.0075) 3,000 (1 + 0.0075) 6 = 2,911,663 2,889,988 868.474 ‘Thus, the amount of this annuity is P17,536.79 if \ / FORMULA 2: PRESENT VALUE b. The present value P of an ordinary annuity with regular payments R at a nominal interest rate I compounded m times a year after t years is | Bias nr") {3) Solution using formula 2 Given: P=? R=3,000 i=0.09 m=12__ ¢ (annually) = 6/12 es ls te 2 2 | - 1 (.0078)"4 = 3000 Toes = 3,000 [!=Besesan7a ¥ 0.0075 _ foosseato8z2a = 3000 (| = 3,000 ( 5.84559763) P= 17,536.79 ‘Therefore, the amount of Present value of Mrs, Manda’s savings after 6 months is 17,536.79. ‘Thus, using different kinds of processes in finding the Present value of an ordinary annuity comes up with the same answer. A certain fund currently has P100,000 and is invested at 3% interest compounded annually. How much withdrawal can be made at the end of each year so that the fund will have zero balance at the end of 12 years? SOLUTION: Since withdrawals are made every end of the year, then this ordinary annuity. Given: Periodic payment (R) = P100,000 Term (t) = 12 years Interest rate per annum (annually) (i) Number of conversion per year (m) = 1 z 0.03 Interest rate per period j = oS = 0.03 .03/3% 100,000 = k [44 992°) 100,000 = k [= 5° =| 100,000 = R ff — 100,000 = r [22788204128 100,000, = R(9.95 94) 9954003994 03994 10,046.21 =R Hence, the amount of yearly withdrawal is P10,046.21. / Periodic payment R can also be solved using the formula for amount Future value F or Present Value P of an annuity. Fa afar SS where R is the regular payment Pis the present value of an annuity F is the future value of an annuity jis the interest rate per period nis the number of payments @) What is it... Activity 1: Question and Answer Directions: Answer the questions briefly. Write your answers in a separate sheet of paper. 1. Differentiate Simple Annuity and General Annuity? 2. What is an Ordinary Annuity? 3. What is the formula in finding the future value of an ordinary annuity? Identify each variable represents. 4, What is the formula in finding the present value of an ordinary annuity? Identify each variable represents. 5. What is the periodic payment formula of an annuity? What's more.. Answer as indicated. Write your answers in a separate sheet of paper. 1. Find the future value of an ordinary annuity with a regular payment of P1,000 at 5% compounded quarterly for 3 years. 2, Find the present value of an ordinary annuity with regular quarterly opayments worth P1,000 at 3% annual interest rate compounded quarterly at the end of 4 years. @ What have I have learned. Complete the sentence below. Write your answers on a separate sheet of paper. 1. is a sequence of payments made at equal (fixed) intervals or periods of time. 2 is the sum of present value of all the payments to be made during the entire term of the annuity. 3. is an annuity where the payment interval is the same as the interest period. is a type of annuity in which the payments are made at the end of each payment interval. 5. is the sum of future values of all payments to be made during the entire term of the annuity. Solve for the following problems. Answer as indicated. Write your answers in a separate sheet of paper. 1, Mr. Ribaya paid P200,000 as downpayment for a car. The remaining amount is to be settled by paying P16,200 at the end of each month for 5 years, If interest is 10.5% compounded monthly, what is the cash price of his car? 2. In order to save for her high school graduation, Marie decided to save P200 at the end of each month. If the bank pays 0.250% compounded monthly, how much will her money be at the end of 6 years? 3. Paolo borrowed P100,000. 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? ) Additional Activities... Answer as indicated. Write your answers in a separate sheet of paper. 1. Ina certain account providing an interest rate of r compounded quarterly, P2,500 is deposited every end of the quarter. What value of r will make the future value of the account P5,200 in six months? General Annuity ~) What I need to know... At the end of the lesson, the learner will be able to: ¥ Illustrate general annuities ¥ Find the future and present values of general annuities and compute the periodic payment of a general annuity ¥ Calculate the fair market value of a cash flow stream that includes an annuity. In the previous lessons, you learned to illustrate a Simple Annuity and you solve the present and future values of simple Annuity. You also compute for the periodic payment of simple annuity. As well as solve problems involving real life situations on simple Annuities. QA What's new. [+ censan avwurry | A GENERAL ANNUITY is an annuity where the length of the payment interval is not the same as the length of the interest compounding period [Sreeweeatonomamyanwory | A general annuity in which the periodic payment is made at the end of the payment interval. REVIEW Examples of General annuity: 1. Monthly installment payment of a car, lo or house with an interest rate that is compounded annually. 2. Paying a debt semi-annually when the interest is compounded monthly. Future and Present Value of a General Ordinary Annuity ‘The Future value F and present value P of a general ordinary annuity is given by: R= is the regular payment j= is the equivalent interest rate per payment interval converted from the interest rate per period n= the number of payments 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? GIVEN: R = 1,000, n = 12(15) = 180 payments, i?) = 0.06m = 4 Find F SOLUTION: ‘The Cash Flow for this problem is shown in the diagram below. (1) Convert 6% compounded quarterly to its equivalent interest rate for monthly payment interval. Fy, =F payne tt p(i+S) = p(it5) sayi2t ott Gta) = (+3) wy s\4 +5) = G+%) yt , Qa +S = (1.015) Q+5) - a o15yy# 12, ” mm 1 (14 5) = (015; = (1.015)5 -1 ne

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