Simple and General

LESSON 11 Annuities
WEEK 11

KNOWLEDGE ENRICHMENT

A. LEARNING OBJECTIVES
At the end of the lesson, you should be able to:
 Illustrate simple and general annuities
 Find the future value and present value of both simple annuities and
general annuities
 Realizes the importance of calculating annuities

B. INTRODUCTION
When you decided to put a huge amount of money into an interest-bearing
investment you wait for years to receive its accumulated value. For most people,
however, making a lump sum is not easy to make. This is where another
investment option becomes convenient. It is called an Annuity. An annuity is
another common business practice of payment. House rental, life insurance
premiums, installment payments, bond dividends, and labor wages are forms of
annuities. In this module we will learn about simple and general annuities and
why is it important to learn annuities.

C. LESSON PROPER

DEFINITION OF TERMS

Annuity – a fixed sum of money paid to someone at regular intervals, subject to a

fixed compound interest rate.

1
Annuity Certain – payable to a definite duration. Begins and ends on a definite or
fixed date. (example: monthly payment of car loan)

Annuity Uncertain – annuity payable for an indefinite duration (example:

insurance); dependent on some certain event.

Simple Annuity – interest conversion or compounding period is equal or the same

as the payment interval.

General Annuity – interest conversion or compounding period is unequal or not

the same as the payment interval.

Ordinary Annuity (Ao) – annuity in which the periodic payment is made at the
end of each payment interval.

Annuity Due – an annuity in which the periodic payment is made at the beginning
of each payment interval.

Deferred Annuity – the periodic payment is not made at the beginning nor the
end of each payment interval, but later date.

General Ordinary Annuity – first payment is made at the end of every payment
interval.

General Annuity Due – first payment is made at the beginning of every payment
interval.

Perpetuities – a series of periodic payments which are to run infinitely or forever.

Example 1.

Determine if the given situation represents a simple annuity or general annuity.

Payments are made at the end of each month for a loan that charges 1.05% interest
compounded quarterly.

Answer:

Since the payment interval at the end of the month (or monthly) is not equal to
the compounding interval, quarterly, the situation represents a general annuity.

Example 2.

Determine if the given situation represents a simple annuity or general annuity.

2
A deposit of 5,500php was made at the end of every three months to an account
that earns 5.6% interest compounded quarterly.

Answer:

Since the payment interval at the end of every three months (or quarterly)is equal
to the compounding interval, quarterly, the situation represents a simple annuity.
Example 3.

Determine if the given situation describes an ordinary annuity or an annuity due.

Jun’s monthly mortgage payment is 35,148.05php at the end of each month.

Answer: Because the payments are made at the end of each month, Jun’s stream
of monthly mortgage payments is an ordinary annuity.

Example 4.

Determine if the given situation describes an ordinary annuity or an annuity due.

The rent for the apartment is 7,000php and is due at the beginning of each month.

Answer: Since the payments come at the beginning of each month, the stream of
rental payments is an annuity due.

FUTURE VALUE OF SIMPLE ORDINARY ANNUITY

The future value of a simple ordinary annuity is

(𝟏 + 𝒊)𝒏 − 𝟏
𝑭𝑽 = 𝑷.
𝒊
Where: FV = Future Value

P = Periodic Payment
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒
i = interest rate per period, where 𝑖 = 𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

n = total number of conversion periods where n = m·t

where: m = no. of conversion periods in a year, and

t = no. of years

Example 5.

3
If you pay 50php at the end of each month for 40 years on an account that pays
interest at 10% compounded monthly, how much money do you have after 40
years?

Solution:

Step 1. List down all the given P = 50

P=periodic payment r = 10 % convert it to decimal it will be

0.10 *(10÷100)
r= rate of interest
m = 12 (monthly)
m = no. of conversion periods in a
year t = 40

t = no. of years

Step 2. Solve for i, substitute the given 𝑟

𝑖=
in the formula. 𝑚

0.10
𝑖=
12
𝒊 = 𝟎. 𝟎𝟎𝟖𝟑𝟑𝟑𝟑𝟑𝟑
or

𝒊 = 𝟖. 𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑−𝟎𝟑

n=mt
Step 3. Solve for n, substitute the given n= 12 · 40
in the formula.
n = 480

4
Step 4. Solve for FV, substitute the (𝟏 + 𝒊)𝒏 − 𝟏
𝑭𝑽 = 𝑷.
given in the formula. 𝒊

Since that we already solved the i and (1 + 0.008333333)480 − 1

𝐹𝑉 = 50.
n, we can now proceed in the given 0.008333333
formula.

(1.008333333)480 − 1
𝐹𝑉 = 50.
0.008333333

53.70065465 − 1
𝐹𝑉 = 50.
0.008333333

52.70065465
𝐹𝑉 = 50.
0.008333333

𝐹𝑉 = 50(6324.078811)

𝑭𝑽 = 𝟑𝟏𝟔, 𝟐𝟎𝟑. 𝟗𝟒
Therefore, the Future Value of the
money is 316,203.94.

5
PRESENT VALUE OF SIMPLE ORDINARY ANNUITY

The present value of a simple ordinary annuity is

𝑷[𝟏 − (𝟏 + 𝒊)−𝒏 ]
𝑷𝑽 =
𝒊
Where: PV = Present Value

P = Periodic Payment
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒
i = interest rate per period, where 𝑖 = 𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

n = total number of conversion periods where n = m·t

where: m = no. of conversion periods in a year, and

t = no. of years

Example 6.

Fernan borrows money to buy a motorcycle. He will repay the loan by making
monthly payments of 1,500php at the end of every month for the next 24 months
at an interest rate of 9% per year compounded monthly. How much did Fernan
borrow?

Solution:

Step 1. List down all the given P = 1,500

P=periodic payment r = 9 % convert it to decimal it will be

0.09 *(9÷100)
r= rate of interest
m = 12 (monthly)
m = no. of conversion periods in a year
t = 24 months, make it in years so it will
t = no. of years
become 2 years

6
 𝑟
𝑖=
𝑚
Step 2. Solve for i, substitute the given
in the formula.
0.09
𝑖=
12
𝒊 = 𝟎. 𝟎𝟎𝟕𝟓
or

𝒊 = 𝟕. 𝟓−𝟎𝟑

n=mt

n= 12 · 2
Step 3. Solve for n, substitute the given n = 24
in the formula.

𝑷[𝟏 − (𝟏 + 𝒊)−𝒏 ]
𝑷𝑽 =
Step 4. Solve for PV, substitute the 𝒊
given in the formula.

1,500[1 − (1 + 0.0075)−24 ]
𝑃𝑉 =
Since that we already solved the i and 0.0075
n, we can now proceed in the given
formula.
1,500[1 − (1.0075)−24 ]
𝑃𝑉 =
0.0075

1,500[1 − 0.835831404]
𝑃𝑉 =
0.0075

7
 1,500[0.164168596]
𝑃𝑉 =
0.0075

246.252804
𝑃𝑉 =
0.0075

Therefore, Fernan borrowed 𝑷𝑽 = 𝟑𝟐, 𝟖𝟑𝟑. 𝟕𝟏

32,833.71.

FUTURE VALUE OF SIMPLE ANNUITY DUE

The future value of a simple annuity due is

(𝟏+𝒊)𝒏 −𝟏
𝑭𝑽 = 𝑷 · · (1 + i)
𝒊

Where: FV = Future Value

P = Periodic Payment
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒
i = interest rate per period, where 𝑖 = 𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

n = total number of conversion periods where n = m·t

Where: m = no. of conversion periods in a year, and

t = no. of years

Example 7.

Suppose Mr. and Mrs. Mariano deposited 20,000php at the beginning of each year
for 5 years in an investment that earns 10% per year compounded annually, what
is the amount or future value of the annuity?

8
Solution:

Step 1. List down all the given P = 20,000

P=periodic payment r = 10 % convert it to decimal it will be

0.10 *(10÷100)
r= rate of interest
m = 1 (annually)
m = no. of conversion periods in a year
t=5
t = no. of years

Step 2. Solve for i, substitute the given

in the formula. 𝑟
𝑖=
𝑚

0.10
𝑖=
1

𝒊 = 𝟎. 𝟏𝟎

Step 3. Solve for n, substitute the given n=mt

in the formula. n= 1 · 5

n=5

Step 4. Solve for FV, substitute the

given in the formula.
(𝟏+𝒊)𝒏 −𝟏
𝑭𝑽 = 𝑷 · · (1 + i)
𝒊

(1+0.10)5 −1
Since that we already solved the i and 𝐹𝑉 = 20,000 · · (1 + 0.10)
0.10
n, we can now proceed in the given
formula.

9
 (1.10)5 −1
𝐹𝑉 = 20,000 · · (1.10)
0.10

1.61051−1
𝐹𝑉 = 20,000 · · (1.10)
0.10

0.61051
𝐹𝑉 = 20,000 · · (1.10)
0.10

𝐹𝑉 = 20,000 (6.1051) (1.10)

𝐹𝑉 = 20,000 (6.71561)
Therefore, the future value of the
investment is 134,312.2.
𝑭𝑽 = 𝟏𝟑𝟒, 𝟑𝟏𝟐. 𝟐

PRESENT VALUE OF SIMPLE ANNUITY DUE

The present value of a simple annuity due is

𝑷[𝟏−(𝟏+𝒊)−𝒏 ]
𝑷𝑽 = · (1 + i)
𝒊

Where: PV = Present Value

P = Periodic Payment
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒
i = interest rate per period, where 𝑖 = 𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

n = total number of conversion periods where n = m·t

Where: m = no. of conversion periods in a year, and

t = no. of years
10
Example 8.

Hope borrows money for the renovation of her house and repays by making yearly
payments of 50,000php at the beginning of each year for a period 10 years at an
interest rate of 8% compounded annually. How much did Hope borrow?

Solution:

Step 1. List down all the given P = 50,000

P=periodic payment r = 8 % convert it to decimal it will be

0.08 *(8÷100)
r= rate of interest
m = 1 (annually)
m = no. of conversion periods in a year
t = 10
t = no. of years

Step 2. Solve for i, substitute the given

in the formula. 𝑟
𝑖=
𝑚

0.08
𝑖=
1

𝒊 = 𝟎. 𝟎𝟖

Step 3. Solve for n, substitute the given n=mt

in the formula. n= 1 · 10

n = 10

Step 4. Solve for PV, substitute the

given in the formula.

11
 𝑷[𝟏−(𝟏+𝒊)−𝒏 ]
𝑷𝑽 = · (1 + i)
𝒊
Since that we already solved the i and
n, we can now proceed in the given
formula. 𝟓𝟎,𝟎𝟎𝟎[𝟏−(𝟏+𝟎.𝟎𝟖)−𝟏𝟎 ]
𝑷𝑽 = · (1 + 0.08)
𝟎.𝟎𝟖

𝟓𝟎,𝟎𝟎𝟎[𝟏−(𝟏.𝟎𝟖)−𝟏𝟎 ]
𝑷𝑽 = · (1.08)
𝟎.𝟎𝟖

𝟓𝟎,𝟎𝟎𝟎[𝟏−𝟎.𝟒𝟔𝟑𝟏𝟗𝟑𝟒𝟖𝟖]
𝑷𝑽 = · (1.08)
𝟎.𝟎𝟖

𝟓𝟎,𝟎𝟎𝟎[𝟎.𝟓𝟑𝟔𝟖𝟎𝟔𝟓𝟏𝟏]
𝑷𝑽 = · (1.08)
𝟎.𝟎𝟖

𝟐𝟔,𝟖𝟒𝟎.𝟑𝟐𝟓𝟔
𝑷𝑽 = · (1.08)
𝟎.𝟎𝟖

Therefore, Hope borrows 362,344.40. 𝑷𝑽 = 335,504.0699 (1.08)

𝑷𝑽 = 𝟑𝟔𝟐, 𝟑𝟒𝟒. 𝟒𝟎

PRESENT VALUE OF GENERAL ORDINARY ANNUITY

The present value of a general ordinary annuity is

𝟏 − (𝟏 + 𝒊)−𝒏
𝑷𝑽 = 𝑷 [ ]
(𝟏 + 𝒊)𝒃 − 𝟏

12
Where: PV = Present Value

P = Regular Payment
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒
i = rate per conversion period, where 𝑖 = 𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

n = total number of conversion periods where n = m·t

where: m = no. of conversion periods in a year, and

t = no. of years
𝑝=𝑛𝑜.𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
b = 𝑐=𝑛𝑜.𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑

Example 9.

Find the present value of an ordinary annuity of 2,000php payable annually for 9
years if the money is worth 5% compounded quarterly.

Solution:

Step 1. List down all the given P = 2,000

P=regular payment r = 5 % convert it to decimal it will be

0.05 *(5÷100)
r= rate of interest
m = 4 (quarterly)
m = no. of conversion periods in a
year t=9

t = no. of years p=12 (12months = annual)

p= no. of months in a payment c=3 (3 months = one quarter)

interval

c=no. of months in a compounding

period
𝑟
𝑖=
𝑚

13
 Step 2. Solve for i, substitute the given 0.05
𝑖=
in the formula. 4

𝒊 = 𝟎. 𝟎𝟏𝟐𝟓

n=mt

n= 4 · 9

n = 36

Step 3. Solve for n, substitute the given

in the formula. 𝑝
𝑏=
𝑐

12
𝑏=
Step 4. Solve for b, substitute the given 3
in the formula.

𝒃=𝟒

Step 5. Solve for PV, substitute the

given in the formula.
𝟏 − (𝟏 + 𝒊)−𝒏
𝑷𝑽 = 𝑷 [ ]
(𝟏 + 𝒊)𝒃 − 𝟏
Since that we already solved the i, n,
and c we can now proceed in the given
formula. 1 − (1 + 0.0125)−36
𝑃𝑉 = 2,000 [ ]
(1 + 0.0125)4 − 1

14
 1 − (1.0125)−36
𝑃𝑉 = 2,000 [ ]
(1.0125)4 − 1

1 − 0.639409157
𝑃𝑉 = 2,000 [ ]
1.050945337 − 1

0.360590843
𝑃𝑉 = 2,000 [ ]
0.050945337

𝑃𝑉 = 2,000[7.077995048]

𝑷𝑽 = 𝟏𝟒, 𝟏𝟓𝟓. 𝟗𝟗
Therefore, the present value of an
ordinary annuity is 14,155.99.

FUTURE VALUE OF GENERAL ORDINARY ANNUITY

The present value of a general ordinary annuity is

(𝟏 + 𝒊)𝒏 − 𝟏
𝑭𝑽 = 𝑷 [ ]
(𝟏 + 𝒊)𝒃 − 𝟏
Where: PV = Present Value

P = Regular Payment
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒
i = rate per conversion period, where 𝑖 =
𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

n = total number of conversion periods where n = m·t

where: m = no. of conversion periods in a year, and

t = no. of years

15
 𝑝=𝑛𝑜.𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
b = 𝑐=𝑛𝑜.𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑

Example 10.

25,000php will be invested in an account at the end of each year at 4%

compounded semi-annually. Find the size of the fund after 15 years.

Solution:

Step 1. List down all the given P = 25,000

P=regular payment r = 4 % convert it to decimal it will be

0.04 *(4÷100)
r= rate of interest
m = 2 (semi-annually)
m = no. of conversion periods in a year
t = 15
t = no. of years
p=12 (12months = annual)
p= no. of months in a payment
interval c=6 (6 months = semi-annual)

c=no. of months in a compounding

period

𝑟
𝑖=
Step 2. Solve for i, substitute the given 𝑚
in the formula.

0.04
𝑖=
2

𝒊 = 𝟎. 𝟎𝟐

n=mt

n= 2 · 15

n = 30

16
Step 3. Solve for n, substitute the given
in the formula.

𝑝
𝑏=
𝑐

Step 4. Solve for b, substitute the given

in the formula. 12
𝑏=
6

𝒃=𝟐
Step 5. Solve for FV, substitute the
given in the formula.
(𝟏 + 𝒊)𝒏 − 𝟏
𝑭𝑽 = 𝑷 [ ]
(𝟏 + 𝒊)𝒃 − 𝟏
Since that we already solved the i, n,
and c we can now proceed in the given (1 + 0.02)30 − 1
formula.
𝐹𝑉 = 25,000 [ ]
(1 + 0.02)2 − 1
(1.02)30 − 1
𝐹𝑉 = 25,000 [ ]
(1.02)2 − 1

1.811361584 − 1
𝐹𝑉 = 25,000 [ ]
1.0404 − 1
0.811361584
𝐹𝑉 = 25,000 [ ]
0.0404

𝐹𝑉 = 25,000[20.083200752]

𝑭𝑽 = 𝟓𝟎𝟐, 𝟎𝟖𝟎. 𝟏𝟗

17
 Therefore, the future value of an
ordinary annuity is 502,080.19.

18