LESSON 4

ORDINARY ANNUITY

Annuity – series of equal payments occurring at equal interval of time.

Ordinary Annuity – payments are made at the end of each period.

Sum of Ordinary Annuities Derivations

Transfer all A’s to zero

𝐴 𝐴 𝐴 𝐴
𝑃= + + + …..
1 + 𝑖 (1 + 𝑖)2 (1 + 𝑖)3 (1 + 𝑖)𝑛

1 𝐴
This is a geometric series with common ratio 𝑟 = and 1st term is .
1+𝑖 1+𝑖
The sum of the geometric series is:
𝑎(1−𝑟 𝑛)
𝑆𝑛 = where a is the 1st term, n is the number of terms and r is the common ratio.
1−𝑟
𝐴 1 𝑛
(1 − ( ) ) 𝐴[(1 + 𝑖)𝑛 − 1] 𝐴[(1 + 𝑖)𝑛 − 1]
𝑃= 1 + 𝑖 1 +𝑖 = =
1 [(1 + 𝑖) − 1](1 + 𝑖)𝑛 ] 𝑖(1 + 𝑖)𝑛
1−
1+𝑖
𝐴[(1+𝑖)𝑛 −1] (1−(1+𝑖)−𝑛
P= 𝑛 =𝐴 )
𝑖(1+𝑖) 𝑖
(1−(1+𝑖)−𝑛
) = is called uniform series present worth factor. (USPWF )
𝑖

To get F , transfer P to n.
𝐴[(1+𝑖)𝑛−1]
𝐹 = 𝑃(1 + 𝑖)𝑛 = (1 + 𝑖)𝑛
𝑖(1+𝑖)𝑛
𝐴[(1+𝑖)𝑛 −1]
𝐹= (USCAF)
𝑖
(1+𝑖)𝑛 −1
= is called uniform series compound amount factor.
𝑖

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 Example 1
Find the annual payment to extinguish a debt of P 100,000 payable for 6 years at 12% interest annually.
Solution:

P = 100,000 i = 12% A=?

(1 − (1 + 𝑖)−𝑛
𝑃=𝐴 )
𝑖
P = 100,000 i= 12% n = 6 years

A = P 24,322.57

Example 2
What annuity is required over 12 years to equate to a future amount of P 200,000?
i = 8% effective

Solution:

F = 200,000 A = ? i = 8%
𝐴[(1 + 𝑖)𝑛 − 1]
𝐹=
𝑖
𝐴(1.0812 − 1)
200,000 =
0.08
A = 10,539.00

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 Example 3
A man paid 10% downpayment of P 200,000 for a house and lot and agreed to pay the 90% balance on
monthly installment for 60 months at an interest rate of 15% compounded monthly. Compute the amount
of monthly payment.
Solution:
Let x = amount of the house and lot
Then 0.1x = 200,000
x = 2,000,000
Amount to be amortized = 2,000,000 – 200,000 = 1,800,000

(1 − (1 + 𝑖)−𝑛
𝑃=𝐴 )
𝑖
sub i= 0.15/12 n = 60 and P = 1,800,000
A = 42,821.87

Example 4. Mr Y bought a house and lot for $ 2,800,000 with a downpayment of 300,000.
Interest is 5% compounded monthly to be paid for 30 years on a monthly basis. Construct and
Amortization Schedule.
Solution:

The loan to be amortized = 2,800,000 – 300,000 = 2,500,000

(1 − (1 + 𝑖)−𝑛
𝑃=𝐴
𝑖
sub P = 2,500,000 i= 5%/12 n = 30 x 12 = 360

A = 13,420.54 monthly payment

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 Amortization Schedule
Payment Amount Principal Interest Balance

1 13,420.54 3,003.87 10,416.67 2,496,996.13

2 13,420.54 3,016.38 10,404.15 2,499,979.74

3 13,420.54 3,028.96 10,391.58 2,490,950.78

4 13,420.54 3,041.58 10,378.96 2,487,909.21

5 13,420.54 3,054.25 10,366.29 2,484,854.95

Discussion:
For Payment 1: Interest = 2,500,000 x 5%/12 = 10,416.67
Principal = 13,420.54 - 10,416.67= 3,003.57
Balance = 2,500,000 - 3,003.57 = 2,496,966.13

For Payment 2: Interest = 2,496,996.13 x 5%/12 = 10,404.15

Principal = 13,420.54 - 10,404.15 = 3016.38
Balance = 2,496,996.13 - 3,016.38 = 2,499,979.74

CALCULATOR TECHNIQUE FOR CONSTRUCTING AMORTIZATION TABLE: ( 570 ES/991 ES/ 991
EX)
Store 13,420.54 to A, 5%/12 to M:
INPUT:
E = F - ( A – MF): MF: A – MF: F = E
CALC F? 2 500 000 =
Result:
F - ( A – MF) 2,496,996.13
MF 10,416.67
A – MF 3,003.87
ENTER continuously until F - ( A – MF) appears.

F - ( A – MF) 2,493,979.74
MF 10,404.15
A – MF 3,016.39

and so on…

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 PROBLEM SET 5
Name: ____________________________Score: ________
Subject and Section: ____________________________

1. A man paid 10% down payment of P200, 000 for a house and lot and agreed to pay the 90% balance
on monthly installments for 60 months at an interest rate of 15% compounded monthly. Compute the
amount of the monthly payment.
Answer: A = P42, 921.87

2. What is the present worth of a 3 years annuity paying P3, 000? At the end of each year, with interest at
8% compounded annually? Answer: P = P7, 731.29

3. How much must be deposited at 6% each year beginning on January 1, year 1, in order to accumulate
P5, 000 on the date of the last deposit, January 1, year 6?
Answer: A = P717.00

4. An instructor plans to retire in one year and want an account that will pay him P25% a year for the next
15 years. Assuming a 6% annual effective interest rate, what is the amount he would need to deposit
now? (The fund will be depleted after 15 years).
Answer: P = P242, 806.00

5. A piece of machinery can be bought for P10, 000 cash, or for P2, 000 down and payments of P750 per
year for 15 years. What is the annual interest rate of the time payments? Answer :i = 4.61%

6. Money borrowed today is to be paid in 6 equal payments at the end of 6 quarters. If the interest is 12%
compounded quarterly, how much was initially borrowed if quarterly payments are P2, 000?
Answer: P = P10, 834.38

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 7. What is the accumulated amount of the five year annuity paying P6, 000 at the end of each year, with
interest at 15% compounded annually?
Answer: F = P40, 454.29

8. A debt of P10, 000 with 10% interest compounded semi-annually is to be amortized by semi-annual
payments over the next 5 years. The first due is 6 months. Determine the semi-annual payments.Answer:
A = P1, 295.05

9. A man purchased on monthly installment a P100, 000 worth of land. The interest rate is 12% nominal
and payable in twenty years. What is the monthly amortization?
Answer: A = P1, 101.08

10. Mr. ALVIN RENZ FLORES borrowed P15, 000 two years ago. The terms of the loan are 10% interest
for 10 years with uniform payments. He just made his second annual payment. How much principal does
he still owe?
Answer: P2 = P13, 023.52

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