Lesson 30

DEFERRED ANNUITY

Reporters:
Fhia Angelika Intong
Althea Cass Pugate
Glen Andrea Omandam
Melvyn Cataluna Jr.
 LESSON OUTLINE

Deferred Annuity

Present Value of a Deferred Annuity

Period of Deferral of a Deferred Annuity

 DEVELOPMENT OF THE LESSON

Introduction/Motivation

-Ask the students what they would like to do on their 18th birthday. Then describe to them the following

situation.

Iya, who is celebrating her 17th birthday today, does not want an extravagant party for her 18 th birthday. Instead,

she asks her parents is she could receive Php500 per month until her 21 st birthday. Iya’s mom decided to save today

so that she can provide extra allowance every month after Iya’s 18th birthday. But how much should the mother save

today so that she will have Php200 every month for 3 years which is due exactly one year from now?
 EXAMPLES OF ANNUITY IN REAL LIFE

• A credit card company offering its clients to purchase today, but to start paying monthly with their choice
of term after 3 months.

• A real estate agent is urging a condominium unit buyer to purchase now and start paying after 3 years
when the condominium redo for occupancy.

• A worker who has gained extra income now and wants to save his money so that he can withdraw his
money monthly starting on the day of his retirement from work.
 Lesson Proper

A. Review Definition of Terms

• Annuity- a sequence of payments made at equal (fixed) intervals or period of time

• Annuity of Immediate or Ordinary Annuity- a type of annuity in which the payments are made at the end of each

period.

B. Present Definition of Terms

• Deferred Annuity- an annuity that does not begin until a given time interval has passed.

• Period of Deferral- time between the purchase of an annuity and the start of the payments for the deferred annuity.

C. Review how to calculate the present value of an annuity immediate or ordinary annuity and give an example.
P R E S E N T VA L U E O F A N O R D I N A RY A N N U I T Y
Review. Suppose Mr. Gran wants to purchase a
cellular phone. He decided to pay monthly for 1
year starting at the end of the month. How
much is the cost of the cellular phone if his
monthly payment is P2500 and interest is at 9
% compounded monthly?
Solution.

Given: R= 2500
𝑖 12 = 0.09
t= 1
m = 12
• Recall the previous example. What if Mr. Gran is considering another cellular phone that has different
payment scheme? In this scheme, he has to pay Php 2,500 for 1 year starting at the end of the fourth
month. If the interest rate is also 9% converted monthly, how much is the cash value of the cellular
phone?

• Note that two payment scheme have the same number of payments n and the same interest rate per
period j. Their main difference is the start of the payments. The first scheme started at the end of the first
interval which makes it an ordinary annuity. The second scheme started on the later date. This annuity
is called deffered annuity.

• In this example, Mr. Gran pays starting at the end of the 4 th month to the end of the 15th month. The time
diagram for this option is given by:
Thus, the present value of the cellular phone is P27, 953.60.

Comparing the present values of the two schemes, the present value in the second scheme is lower than the present
value in the first because the payments in the second scheme will be received on a later date.

b. Derive the present value for calculating the present value of a deferred annuity by generalizing the procedure from
the previous example.

Consider the following time diagram where k artificial payments of R are placed in the period of deferral.
EXAMPLE 1:
On his 40th birthday, Mr. Ramos decided to buy a
pension plan for himself. This plan will allow
him to claim P10, 000 quarterly for 5 years
starting 3 months after his 60th birthday. What
one-time payment should he make on his 40th
birthday to pay off this pension plan, if the
interest rate is 8% compounded quarterly?
 Solution.
Given: R= 10,000
= 0.08
𝑖4
t= 5
m= 4

Find: P

The annuity is deferred for 20 years and it will go on for 5 years. The first payment is due
three months (one quarter) after his 60th birthday, or at the end of the 81st conversion
period. Thus, there are 80 artificial payments.

Number of artificial payments: k= mt= 4(20)= 80

Number of actual payments: n=mt=4(5)= 20
Interest rate per period: j= i^4\m=0.08\4 = 0.02
EXAMPLE 2: A credit card company offers a deferred payment option
for the purchase of any appliance. Rose plans to buy a smart television
set with monthly payments of Php 4,000 for two years. The payment will
start at the end of 3 months. How much is the cash price of the TV set if
the interest rate is 10% compounded monthly?

Given: R = 4,000
i^12 = 0.10
t=2
m = 12

Find: P

The annuity is deferred for 2 months, and payments will go on for 2 years. Numbers of
artificial payments.
Number of artificial payments: k = 2
Number of actual payments: n = mt =12(2) = 24
Interest rate per period: j = i^12\m = 0.10\12 = 0.00833

If you assume that there are payments in the period of deferral, there would be a total of
K + n = 2 + 24 = 26 payments.