ANNUITY

ANNUITY
Annuity is a sequence of equal payments made
regularly (or periodically).

Example: annual insurance premiums, housing

loan amortizations, rental payments, retirement
or pension, and college educational plan
ANNUITY
Annuity is a term that refers to a deposit or
investment agreement between a potential
depositor or investor and a financial
institution that promises to pay out a steady
amount of money over time
ANNUITY
The ultimate purpose of an
annuity is to make sure that the
investor or depositor will get
steady source of funds.
ANNUITY
According to the Investing Answers Financial
Dictionary, Annuity is a contract whereby
investor makes lump-sum or installment
payment to an insurance company, bank or
other financial institution that, in return,
agrees to give the investor either a higher
lump-sum payment in the future or series of
guaranteed payments
Classifications of Annuity
Annuities may be classified in
different ways, as follows:
 I. According to payment interval and
interest period
Simple Annuity is an annuity for which the
compounding and the payments happen at the
same time.

General Annuity is an annuity for which the

compounding and the payments do not happen
at the same time.
 EXAMPLES:
Identify which of the following
illustrate simple or general annuity
1. Monthly payments of
P3,000 for 4 years with
interest rate of 3%
compounded monthly
 2. Annual payments of
P12,500 with interest rate of
10.% compounded semi-
annually for 6 years
3. Monthly payments of
2,000 for 5 years with
interest rate for 12%
compounded quarterly
4. Quarterly payment of an
accumulated amount of
P80,000 for 2 years with
interest rate of 8%
compounded quarterly
5. Monthly instalment of an
appliance cash prize of
P20,000 for 6 months with
an interest rate of 6%
compounded monthly
 II. According to time of payment
Ordinary or Fixed Annuity is an annuity for
which the payments are made at the end of each
interest period.

Deferred or Due Annuity is an annuity for which

the payments are made at the beginning of the
period.
 III. According to duration
Annuity Certain is an annuity in which
payments begin and end at definite times

Contingent Annuity is an annuity for which

the payments extend over an indefinite ( or
indeterminate ) length of time.
 Term of an annuity (𝒕) – time
between the first payment interval
and last payment interval
Regular or Periodic Payment (𝑹)
– the amount on each payment
 Amount (Future Value) of an
annuity (𝑭) – sum of future values
of all payments to be made during
the entire term of the annuity
Present Value of an annuity (𝑷)
– sum of present values of all
payments to be made during the
entire term of annuity
SIMPLE ANNUITY
Simple Annuity is an annuity
where the payment interval is
the same as the interest period
Simple Annuity
Amount (Future Value)
𝟏+𝒋 −𝟏 𝒏
𝑭=𝑹
𝒋
where: 𝑅 = regular payment
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝒎
 Note: Conversion Period

Conversion Period Frequency of Conversion (m)

Annually 1
Semi - annually 2
Quarterly 4
Monthly 12
 EXAMPLE:

1. Suppose Mrs. Remoto would like

to save P3,000 every month in a fund
that gives 9% compounded monthly.
How much is the amount or future
value of her savings after 6 months?
 EXAMPLE:

2. Aling Paring started to deposit Php

2,000 quarterly in a fund that pays
5.5% compounded quarterly. How
much will be in the fund after 6
years?
Simple Annuity
Present Value
−𝒏
𝟏− 𝟏+𝒋
𝑷=𝑹
𝒋
where: 𝑅 = regular payment
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝒎
 EXAMPLE:
3. Mr. Ribaya paid Php 200,000 as
down payment for a car. The
remaining amount is to be settled by
paying Php 16,200 at the end of each
month for 5 years. If interest is 10.5%
compounded monthly, what is the cash
price of his car?
 EXAMPLE:
4. A refrigerator is for sale at P17,999
in cash or on terms, P1,600 each
month for the next 12 months. Money
is 9% compounded monthly. Which is
lower, the cash price or the present
value of the instalment terms?
Simple Annuity
Periodic Payment
𝟏− 𝟏+𝒋 −𝒏
𝑹 = 𝑷/
𝒋
where: 𝑃 = present value
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝒎
Simple Annuity
Periodic Payment
𝟏+𝒋 −𝟏 𝒏
𝑹 = 𝑭/
𝒋
where: 𝐹 = future value
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝒎
 EXAMPLE:
5. Student A borrowed Php 100,000.
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?
 EXAMPLE:
6. Student B will return an amount of
P150,000 after 2 years. To repay the
loan, she must pay an amount every
month with an interest rate of 6%
compounded monthly. How much
should she pay every month?
TRUE or FALSE
 1. Periodic or regular
payment is the amount of
each unequal payment.
2. In the formula of periodic
or regular payment of
simple annuity, the value of
n is the number of
conversion per year
 3. The corresponding
frequency of quarterly
conversion period is 4
4. The interest rate divided
by the number of payments
is carry out to find the
interest rate per period.
5. Periodic payment can be
solve using the future value
and present value.
GENERAL ANNUITY
General Annuity is an annuity
where the payment interval is
not the same as the interest
period
 EXAMPLE:

1. Kris started to deposit Php 1,000

monthly in a fund that pays 6%
compounded quarterly. How much
will be in the fund after 15 years?
 Amount (Future Value)
𝒏
𝟏+𝒊 −𝟏
𝑭=𝑹
𝒊
where: 𝑅 = regular payment
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝑖 = interest rate per period, computed by 𝒊 = (𝟏 + 𝒋) 𝒄 −𝟏
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝒎
𝑐=
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
 Present Value
𝟏− 𝟏+𝒊 −𝒏
𝑷=𝑹
𝒊
where: 𝑅 = regular payment
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝑖 = interest rate per period, computed by 𝒊 = (𝟏 + 𝒋) 𝒄 −𝟏
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝒎
𝑐=
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
 EXAMPLE:
2. Ken borrowed an amount of money
from Kat. He agrees to pay the
principal plus interest by paying Php
38,973.76 each year for 3 years. How
much money did he borrow if interest
is 8% compounded quarterly?
 Periodic Payment
𝒏
𝟏+𝒊 −𝟏
𝑹 = 𝑭/
𝒊
where: 𝑅 = regular payment
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝑖 = interest rate per period, computed by 𝒊 = (𝟏 + 𝒋) 𝒄 −𝟏
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝒎
𝑐=
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
 Periodic Payment
−𝒏
𝟏− 𝟏+𝒊
𝑹 = 𝑷/
𝒊
where: 𝑅 = regular payment
𝑛 = number of payments
𝑟 = interest rate
𝑚 = number of conversion per year
𝑖 = interest rate per period, computed by 𝒊 = (𝟏 + 𝒋) 𝒄 −𝟏
𝒓
𝑗 = interest rate per period, computed by 𝒋 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝒎
𝑐=
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
 EXAMPLE:
3. To accumulate a fund of Php
500,000 in 3 years, how much money
should Aling Paring deposit in her
account every 3 months if it pays an
interest of 5.5% compounded
annually?