ANNUITY

Definition of Terms:
Annuity – a fixed sum of money paid to
someone at regular intervals, subject to a
fixed compound interest rate.
Annuity Certain – payable for a definite
duration. Begins and ends on a definite or fixed
date (monthly payment of a 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 (A) – 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 is made at the beginning of
each payment interval.
Deferred Annuity – the periodic payment is not
made at the beginning nor at the end of each
payment interval, but some 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.
Determine whether the given situations
represent simple annuity or general annuity.

a. Payments are made at the end of each

month for a loan that charges 1.05%
interest compounded quarterly.
b. A Deposit of P5,500.00 was made at the end
of every three months to an account that
earns 5.6% interest compounded quarterly.
Determine whether the given situation
describes an ordinary annuity or an annuity
due. Justify your answer.

a. Jun’s monthly mortgage payment is

P35,148.05 at the end of each month.

b. The rent for the apartment is

P7,000.00 and due at the beginning of
each month.
Definition:
The Future Value of an annuity is the total
accumulation of the payments and
interest earned.
The Present Value of an annuity is the
principal that must be invested today to
provide the regular payments of an
annuity.
 Simple Ordinary Annuity
Future Value of Simple Ordinary Annuity
(1 + 𝑖)𝑛 −1
𝐹𝑉 = 𝑃 ⋅
𝑖
Where: FV = Future value or Amount in
P = Periodic payment
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion periods
Present Value of Simple Ordinary Annuity
−𝑛
𝑃[1 − 1 + 𝑖 ]
𝑃𝑉 =
𝑖
Where: PV = Future value or Amount in
P = Periodic payment
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion periods
Problem:
1. If you pay P50.00 at the end of each
month for 40 years on account that
pays interest at 10% compounded
monthly , how much money do you
have after 40 years?
2. Alex and Tony are twins. After graduation
and
being able to get a good job, they plan for
retirement as follows.
• Starting at age 24, Alex deposits P10,000.00
at the end of each year for 36 years.
• Starting at 42, Tony deposits P20,000.00 at
the end of each year for 18 years.
Who will have a greater amount at retirement
if both annuities earn 12% per year
compounded annually?
3. Rose works very hard because she wants
to have enough money in her retirement
account when she reaches the age 60.
She wants to withdraw P36,000.00 every
three months for 20 years starting 3
months after she retires. How much
must Rose deposit at retirement at 12%
per year compounded quarterly for the
annuity?
4. Fernan borrows money to buy a
motorcycle. He will repay the loan by
making monthly payments of P1,500.00
per month for the next 24 months at an
interest rate of 9% compounded
monthly. How much did Fernan borrow?
How much interest does Fernan pay?
 Simple Annuity Due
Future Value of Simple Annuity Due

1+𝑖 𝑛
𝐹𝑉 = 𝑃 ⋅ 1+i
𝑖
Where: FV = Future value or Amount in
P = Periodic payment
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion periods
Present Value of Simple Annuity Due
𝑃[1− 1+𝑖 −𝑛 ]
𝑃𝑉 = (1 + i)
𝑖

Where: PV = Future value or Amount in

P = Periodic payment
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion periods
Regular Payment (P) of an Annuity
Simple Ordinary Annuity
𝐹𝑉 𝑖 𝑃𝑉 𝑖
𝑃= 𝑛
𝑃=
(1 + 𝑖) −1 1 − (1 + 𝑖)−𝑛
Where: PV = Future value or Amount in
FV = Future Value
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion
periods
 Regular Payment (P) of an Annuity
Simple Annuity Due
𝐹𝑉 𝑖 𝑃𝑉 𝑖
𝑃= 𝑃= −𝑛 ](1 + 𝑖)
𝑛
[(1 + 𝑖) −1](1 + 𝑖) [1 − (1 + 𝑖)
Where: PV = Future value or Amount in
FV = Future Value
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion
periods
Problem. Regular Payment of Simple Annuity
Mary borrows P500,000.00 to buy a car. She has
two options to repay her loan. The interest is
compounded monthly.
Option 1. 24 monthly payments every
beginning of the month at 12% per year.
Option 2. 60 monthly payments every end of the
month at 15% per year.
Find: a. Mary’s monthly payment under each
option.
b. The interest Mary pays under each option.
Problem. Regular payment of Simple
Ordinary Annuity.
Eva obtained a loan of P50,000.00 for the
tuition fee of her son. She has to repay the
loan by equal payments at the end of every
six months for 3 years at 10% interest
compounded semi-annually. Find the
periodic payment.
 Present Value And Future Value
Of Deferred Annuity

Present Value
1 − (1 + 𝑖)−(𝑛+𝑑) 1 − (1 + 𝑖)−𝑑
𝑃𝑉 = 𝑃[ − ]
𝑖 𝑖
Where: PV = Present value or Amount in
P = Regular payment
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion periods= Kt
d = number of deferred period
Future Value
[ 1+𝑖 𝑛 −1]
F𝑉 = 𝑃
𝑖

Where:
FV = Future Value
P = Regular payment
i = interest rate per period
where
𝑟
𝑖=
𝐾
n = total number of conversion periods= Kt
d = number of deferred period
Problem.
Find the present value of a deferred
annuity of P1,500 every 3 months for 8
years that is deferred 3 years if money is
worth 6% converted or compounded
quarterly.