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Senior High School
Senior High School
Senior High School
Annuities
Learning Goals
At the end of the lesson, the student is able to:
1 Illustrate simple and general annuities, distinguish between simple and general
annuities, and find the future and present value of simple annuities.
This payment scheme done by installment done periodically and in equal amounts is called an annuity.
Annuity
a sequence of periodic payments by
installment and in equal amounts
Definition of Terms
Annuity
A type of annuity in which the payments are made at the end of each payment interval.
Future Value of Annuity
An installment
Time Diagrampayment
of Ordinary
of an appliance
Annuity of every month for .
Rent
𝐹
3,000
𝑅 3,000
𝑅 3,000
𝑅 3,000
𝑅 3,000
… 3,000
𝑅
0 1 2 3 4 …
5 6
𝑛 Term
Payment
6 𝑚𝑜𝑛𝑡h𝑠
Periodic
Interval
Payment
Term
Payment Interval
Ordinary Annuities
Unless mentioned otherwise, all annuities discussed are ordinary annuities, that is, the regular
payments are assumed to be done at the end of the payment period.
Simple Annuity
𝑛
𝑛
𝑛
An annuity where the payment interval2is 2the22same 2 3as the interest 2𝑛 −2period. 𝑛𝑛((( 𝑗𝑗
𝑗)))
𝐹
𝐹−−
−−𝐹 𝐹
𝐹(1((1+
(1+
1+
+1+ 𝑗𝑗𝑗𝑗))𝑗)=
𝐹
)=𝑅
)=
=−
==𝑅
( 𝑅
(𝑅
(1+
𝑅
1+
(+1+
+ +𝑅
𝑅
𝑗𝑗)𝑅)1+
(+𝑗+(𝑅
)1
𝑅(𝑗+
+ 1+
𝑅
( )1+
+𝑗( 1+
𝑅
)𝑅
𝑗+
)𝑗(()1+
1+
𝑅𝑗+)(𝑅𝑗1+
𝑗) (+…+
+ ) 1+
𝑅 𝑗…+
( )1+
++…+ 𝑗 )+…+
𝑅+…+
𝑅
𝑗𝑅 )(31+
( 1+ 1+
𝑗𝑅
(+…+)𝑗𝑛)𝑗−𝑛()1+
𝑅
−2
1+ (𝑅
1+ 𝑗𝑅
+(+1+
𝑛𝑛−2+1
𝑗) )𝑗𝑅
−2 𝑛 −1
()1+
+(𝑗1+
𝑅 𝑗+
)+ 𝑛 −𝑛1− 1𝑛 −1 𝑛𝑛
()1+
𝑅𝑗𝑅)+( +
1+
𝑗1+
𝑅 ) 𝑅 ( )1+
𝑗(𝑗(1+ ) −1
()1+
1+
−1 +1
𝑗𝑗)𝑗𝑗) )) 𝑛𝑛
22 𝑛𝑛−−22 −1 ( 𝑗𝑗𝑗
𝑛𝑛−1 𝑗𝑗)
𝐹 (−
1+ 1 𝑗 −𝑗 𝐹 𝐹 𝑅𝑅 − 𝑅 𝑅 1 1 𝑗 𝑗 − 𝑅 𝑅 1+1+ 𝑗 𝑗 − … −𝑅 𝑅
Example. Suppose you would like to save at the end of , for six months, in a fund that gives . How
( +) ) =−
= + ( ( + + ) )
+ ( ( ) ) +…+ ( 1+
( 1+ 𝑗 𝑗) ) +− 𝑅 𝑅 ( 1+
( 1+ 𝑗 𝑗) )
much would be your savings after ? 𝑛𝑛 𝑛 𝑛
𝑗
𝑛 𝑛
𝐹 𝑗 2 ( (1 1 𝑛 −2+ 𝑛+ 𝑛 𝑛 𝑗 𝑗 𝑛))− 1 (− − 𝑗 ( )𝑗 𝑗1 )
𝑛)1( 𝑗)
𝐹−
𝐹
𝐹 +
+
( 1++𝐹𝑗() −
1𝐹𝑗
𝐹𝑗𝑗
𝐹
𝐹
+ +
=− 𝐹𝑗
−𝑅𝑗−+)𝑅−
−
−−( 1+𝐹𝑗
𝐹
𝑗𝐹
)𝐹
+ 𝑅= 1+
(=
== 𝑅
𝑗 )𝑅
= 𝑅
+ …+
(𝑅 (𝑅
((1+
𝑅
(1+
1+
( 1+ 𝑗 ) 𝑗𝑗
)𝑗
+)𝑅
)−( 1+
−
− 𝑗1
) 1
𝑅
)+ 𝑅
) (1+ 𝑗 )
This example illustrates the concept of time value of money. An amount such as on the first 𝑗
𝑗 𝑗
𝑗 𝑗 𝑗of
month
payment, has a different value than on the second month of payment, or on the third month of payment,
and soCash
on. Flow 3,000
𝑅 3,000
𝑅 3,000
𝑅 3,000
… 3,000
𝑅 3,000
𝑅
This means that if we consider interest, we cannot just simply multiply because each of the individual
not compounded
payments is valued differently from the others.
0 1 2 3 …
4 𝑛 5
−1 6
𝑛 3,000
𝑅
3,000 ( 1.0075 )0
compounded
The actual way to find the total savings at the end of is to compute theonce
6 𝑚𝑜𝑛𝑡h𝑠 3,022.5
maturity value of 3,000
each
𝑅 (rent
1 at the
( 1.0075
+ 𝑗 ))1
end of . By the end of , the initial rent on the first month would have earned
2 compounding by compounding interest for , 2
periods
3,045.17
3,000⋮ ( 1.0075 )
the next rent on the second month would have earned 3
by compounding interest for , and so on.
compounding
compoundingperiods
periods
3,068.01
𝑛 − 33
Compound Amount 3,000
𝑅 ( 1+ ( 1.0075
𝑗) )
4
compounding
compoundingperiods periods
𝑖𝑖𝑚𝑡 𝑚𝑡
𝑚𝑡
0.09
0.09
𝑛0.09
𝑛12𝑡
12 12
𝑡
) 0.09
12𝑡( 1212𝑡
12
𝑡
0.09 12
0.09
0.09
12
𝑡 𝑡 12𝑡
12 𝑡 3,091.02
𝑅
3,000
( 1 (
+ 𝑗
1.0075
) 𝑛−2
) 4
𝐹=𝑃 ((1+ ( )
1+
𝑚
𝑚
𝑚𝑡
𝑚𝑡
1+𝑗𝑗) ) =3000
=3000+( 1.0075
=3000 1+0
=3000+ 1+
1+
1+
.0075
)) 1+
5
12 ( ( ( ()) ()( ) ) ))
) 1+
compounding
compounding
1212 121212
1+
1+ periods
periods
12 𝑅3,114.2
3,000
( 1 (
+ 𝑗
1.0075
) 𝑛 − 15
)
𝑗 )+ 𝑅 ( 1+ 𝑗 ) + …+ 𝑅 ( 1+ 𝑗 )𝐹=18,340.89
2 𝑛−2 𝑛 −1
𝐹=𝑅+ 𝑅 (1+ + 𝑅 (1+ 𝑗 )
Example.
In order to save for money for high school graduation, you decided to save at the end of
each month in a bank account. If the bank pays compounded monthly, how much will your money be
at the end of ?
Given:
Solution:
𝑖 0.0025
𝑗= = =0.000208 3́ 𝑛
𝑛=𝑚𝑡=
=𝑚𝑡= 12 ( 6 )=72
𝑚 12
𝑛𝑛𝑛 72 72
(1+
((1+
1+𝑗𝑗)𝑗) )−
−1
−1
1 ( 1+0.000208
( 1+0.0002083́ ) 3́ −
)−11−1
𝐹=𝑅
𝐹=𝑟
𝐹= 𝑅 =200
=200
=200∙∙ ∙ =14,507.02
𝑗𝑗𝑗 0.000208
0.000208
0.0002083́ 3́
Example. You made a credit card loan of that charges monthly interest. If you would only pay the
minimum charge of per month for , how much would you have paid back to pay off your credit card
loan?
Given:
Solution:
𝑖 𝑖 0.0025
0.19 5
406
𝑗𝑗=
= ==
𝑚𝑚 12
12
= 0.0158 3́3́
=0.000208 𝑛=𝑚𝑡= 12
12
= 40
=56 ( )
𝑛𝑛 4040 72
( 1+
1+ 𝑗𝑗)) −1−1 ((1+0.0158
(1+0.000208
1+0.01583́3́) )3́−1
)−1
−1
𝐹=𝑅
𝐹= 𝑅 =1250∙∙∙
=1250
=1250 =69,043.88
𝑗𝑗 0.0158
0.000208
0.01583́3́ 3́
Example. You plan on buying a car and found a car loan deal which pays at at an interest rate of
compounded monthly for . How much will the car cost you?
Given:
Solution:
𝑖𝑖 0.0025
0.075
𝑗𝑗=
= == =0.006253́
=0.000208 𝑛
𝑛=𝑚𝑡=
=𝑚𝑡= 12 ( 5
6 ) =60
=72
𝑚𝑚 12
12
𝑛 𝑛
1+𝑗𝑗)𝑗)𝑛)−1
((1+
1+ −1
−1 ( (1+0.00625
1+0.00625
( 1+0.00 )60)60
625
−1−1)60 − 1
𝐹=𝑅
𝐹 =𝑟 =20000
=20000
=20000∙∙ ∙ =1,450,542.11
𝑗𝑗 𝑗 0.00625
0.00625
0.00 625
Present Value of Annuity
𝑗𝑗 11 𝑅 −1 𝑅 −2𝑅 − (𝑅 𝑅 −𝑛
( ))
The present value ∙of∙𝑃
1
1+
term+ 𝑗 1
of 𝑗the 1+ +𝑗 𝑗
annuity.
annuity
𝑃== 𝑅 ( is
( 1
the𝑗sum
1+
+ 𝑗 )
)+ +of 𝑅
present
( 1+ 𝑗 )
( 1+
2
+values
𝑗 ) +of
( 1+ 𝑗 )
all
…+ 3
payments
+𝑅 …+( 1+ to
𝑗 be
)
(1+ 𝑗 )
𝑛 −1 )
made
𝑛− 1
during
+ 𝑅
+ ( 1+the entire
𝑗) 𝑛
( 1+ 𝑗 )
𝑗𝑗
1 Example. 𝑃1 1 𝑃you 𝑅 would𝑅like
𝑅𝑅 𝑅 𝑅 𝑅𝑅 𝑅 𝑅 𝑅 𝑅 𝑅 𝑅 𝑅𝑅 of𝑅per month 𝑅 𝑅to1 at
𝑅
( 1𝑗 )+ 𝑗)1+
− ∙ 𝑃
1+ ) 1𝑗+1𝑗 (+1+𝑗 (𝑗 )( (11(++1+) 𝑗𝑗))𝑗() ( (1+
Suppose
for 𝑗. But
1+
=∙ 𝑃 ∙𝑃
==−
you 𝑗do not want to
to
+invest
1+
+
+
22
− in a 2transaction
𝑗 trouble
go the
+ +
233
1( 1+
−
+ that
… 3 −
1+of𝑗paying monthly,
needs
+…+34
to
+ put
…+
+…+ an annuity
−
𝑛 −1 𝑛 −1
1 + 𝑗 instead you want
)+ 𝑗𝑗)𝑗)() ( (1+
1+
) 𝑗𝑗())1+ (𝑗 ) 1+ to
()(11+
fund
+ 𝑛−
+
𝑛 𝑛1
−+
𝑗 pay in lump
( 1+
+
𝑛
∙
) 𝑗𝑗) )𝑗 )
+ 𝑗 at the 1
1 sum
𝑗𝑗)()𝑗 ) ( 1
)( 1+1+
(+ 𝑛𝑛+1
+1𝑛 + of
start 𝑗
N1ote
1
1
1 𝑅the
that
𝑅1 𝑃
++
+ transaction
what
𝑗𝑗 𝑗weso 𝑅that +
mean
1 itbywould
1𝑃 𝑗earn
paying
𝑗𝑗 −
𝑗in
𝑅1the same
lump
1 amount
sum or
𝑅 in at
𝑅 𝑅𝑅 the
full is
𝑅
𝑅 𝑅end
thatofwe
six want
𝑅 months. How
1amuch
to pay 𝑅
𝑅 then
discounted
𝑅 1 1
1would
1 you
+pay
amount
𝑅 𝑗at
one
((1
time
1 𝑗𝑗
+ 𝑗+ )𝑗 𝑗1+)((𝑗 ((( 1+( 𝑗1) 1
𝑃
the
at
−
𝑃
𝑗
𝑃
start?
the
1
𝑃 ∙∙
= −
𝑃∙𝑃
beginning
−1−
of the
1
1
−
1 1
+
+
+ 1
+
(1+)+
+𝑗+𝑗)𝑗 )))𝑗)( 1+1𝑗 ) 1
transaction
= −
=𝑃
𝑗 𝑗𝑗 1+ 1+
𝑗 2
=
=
instead
==3
of 𝑗
−
paying
1+
+ (+𝑗 ((𝑗
…−
for
−a
𝑗 𝑗𝑗 (1+(((𝑗1) +(1
1 −1 −
monthly
11
− −
−
due.
1+ 𝑛
− 𝑛 𝑛∙
−1
(( ) (𝑗)
Notice
(𝑗 𝑗1
(1+
)+ 1
one time at the beginning is less than that of the amount if it would have been paid on a monthly basis,
that
1 1
−
)))𝑗 𝑗)))
the amount
) 𝑗+
+ ++ 𝑗𝑗𝑗
)( 1+𝑛+ 𝑛
𝑛
𝑗𝑛1 paid
𝑛
𝑛+1
can think of this as a privilege for the investor since the fund is readily made available not
We 𝑃=17,536.79 at compounded
the start of
the transaction instead
−𝑚𝑡
−𝑛
𝑚𝑡 0
of 𝐹waiting
−1
9 −1 −1 1the next 2
for
−1 −1 3 the funds
to accumulate …
4 for use.
𝑛 5
−1This lump
6
𝑛sum 3,000
paid at the
( (𝐹 𝑖𝑖 )−1 0.09 −1𝐹 𝐹𝐹
𝐹 9 9
9𝐹 9
𝑃=3,000
𝑃=
𝐹
𝑃= ( ( )) ) ((( )))
=3,000
beginning 𝐹
𝑃2 𝑅1+
1+
,of
977.67
1+
1the
𝑖
.1+
𝑚
0075
𝑗𝑚𝑡
transaction
𝑚 12𝑖𝑖𝑖𝑖 𝑖
) 𝑚𝑡
𝑚𝑡
𝑚𝑡
𝑚𝑡 is called
𝑚𝑡
2 2
2
𝑖 2
2
compounded
𝑚𝑡 the present value of annuity, and recall that getting the present
once
value
3,022.5
𝑃 (𝑃1+ 𝑃=
( 1+
( ) ((( ())))) ( )
of a compounded
𝑛
𝑛
𝑗 ) 3,000
1+
𝑗 )𝑛𝑛 𝑅2
𝑛 3,000
𝑅 𝑅
𝑅
𝑚 ,
( 1+(
( 1+
( 955.50
1
1+
amount is termed
(𝑛1.0075
𝑗𝑗) )𝑗−1
𝑛 𝑚
+
𝑛
𝑛)−1
𝑚
𝑚
1𝑚 𝑚 𝑗 𝑡)𝑚
𝑡
−
−11𝑖 𝑖 1𝑖 𝑖𝑖 𝑖11 1
𝑡) −2
𝑡 𝑡
2 𝑡
as discounting.
𝑖1𝑖1 1 11𝑡𝑡
2 compounding periods
3,045.17
𝑃 𝑃Note
( 1+
𝑃=
𝑃=17,536.79
(1+
𝑃=
( 1+
months 𝑛
(( ( (( ())()() ()()())()()()))()() ) ) )
1+𝑛𝑛 𝑗𝑗that
)𝐹=
𝑃=
)𝑃===𝑅
=
2
) 3,000
𝑗 ) 𝑗0.0075
𝑛
𝑅
𝑅 (1( 1+
1−−
regardless
𝑗𝑗𝑗 ,(( 1+1
is the same due
1−
933.50
( 1+
𝑗 ) 𝑛whether
1.0075
𝑗((𝑗1+
(𝑗1+)+
−1
−
(𝑗1+
) 6you
𝑛 𝑛 𝑛
) 𝑗 )(𝑚
0.0075
𝑚𝑡 to
1+𝑗
) 𝑚𝑚
𝑗𝑚
− 𝑛 −3
𝑗) )(𝑚
)𝑚
𝑡 the time
𝑛3
)(𝑗 𝑗)( )𝑚𝑛paid
(𝑗𝑚
𝑛 𝑛𝑛 𝑛a monthly 𝑛𝑛
(𝑗) 𝑗)( )𝑗 ) ( 𝑗( )𝑗 )
−4 value of money.
due or 3 compounding periods
in lump sum, the future value by the
4 compounding periods
end of six
3,068.01
𝑃 ( 1+ 𝑗
𝑃= 3,000
) 2 ,⋮
𝐹= 𝑃 (( 1+ 𝑗 ) () ) 911.66
𝑖
( 1.0075 ) 𝑖 1 1 3,091.02
( 1+
An
𝑃=
𝑛
𝐹=𝑃
𝑗 )alternative
2 (,1
3,000
𝑅 way
889.99
+
(())
𝑚for𝑚computing
( 1.0075
𝑛
𝑛 𝑛
−5
− (𝑛 − 1 ) 5 compounding periods
𝑗 )( 𝑗 )( 𝑗 ) ) the present value of annuity is to sum up the present values of all the
3,114.2
payments made during the lifetime of a transaction.
2
𝑅,( 868.47
𝑃= 3,000 1( 1.0075
+ 𝑗) )
− −6𝑛
𝐹=18,340.89
Example.
Paolo borrowed . He agrees to pay the principal plus interest by paying an equal amount of
money each year for . What should be his annual payment if interest is compounded annually?
Given:
Solution:
𝑖 𝑖 0.0025
0.08
𝑗𝑗== = = = 0.083́
=0.000208 𝑛=𝑚𝑡=
𝑛 =𝑚𝑡 =12
1((63))=72
=3
𝑚𝑚 12 1
𝐽𝐽 𝑃𝑃𝐽𝑃𝐽
𝑃𝐽𝐽 100,000
𝑅100,000
𝑅1 1 ( 0.08 ( 0.08
1 1) ) 1 𝐽 1
∙ 𝑅𝑃=
1−
=
−1−
1
1
1− −
11 1111
∙ ∙𝑃=
− 𝑛𝑛 𝑛𝑛𝑛𝑛 11−−
( ( ( ( ) ) )( )
𝑃=
==𝑅 11
=
( 𝑗 𝑗( 1+
1+ 𝑗
−
)
−
𝑛 𝑛
𝑗 (
)1 1
1+
( 1+𝑗 )
3 3
𝑗 ) (
∙
=38,803.35
𝑛 𝑛
1+1−𝑗) (
) 𝑛
1 ( 1+ 𝑗 )𝑛 )
((1+
1+1+
( ((1+
𝑗1+
( 𝑗1+𝑗𝑗𝑗𝑗
) ) )) ) ) ( 1+
( 1+0.08 0.08 ) ) (1+ 𝑗 )𝑛
Cash Value or Cash Price
The cash value or cash price is equal to the down payment (if there is any) plus the present
value of the installment payments.
Example.
You plan on buying a car and found a car loan deal which pays at at an interest rate of
compounded monthly for . How much is the cash value of the car if you paid a down payment of ?
Given:
Solution:
𝑖𝑖 0.0025
0.075
𝑗𝑗=
= == =0.006253́
=0.000208 𝑛
𝑛=𝑚𝑡=
=𝑚𝑡= 12 ( 5
6 ) =60
=72
𝑚𝑚 12
12
𝑅 11 20,000
20,000 11
𝑃=
𝑗 (
11 −
−
((1+ )
𝑛𝑛
1+𝑗𝑗))
=
=
0.00625
0.00625 ((
11−−
( 1+0.00625 ))
6060
( 1+0.00625) )
=998 ,106 .1 6
=117,741.76
Cash
Cash Value Down Payment Present Value
Test your understanding.
1.Find the present value and the amount of the following ordinary annuities.
a. Quarterly payment of for with interest rate of
b. Semi-annual payments of for with interest rate of .
c. Daily payments of for with interest rate of .
2. Answer the following problems.
d. Peter started to deposit quarterly in a fund that pays compounded quarterly. How much will be
in the fund after ?
e. A buyer of a lot pays cash and every month for . If money is , how much is the cash value of the
lot?
f. How much should be invested in a fund each year paying compounded annually to accumulate
in ?
g. A loan is payable in . To repay the loan, the debtor must pay an amount every with an interest
rate of . How much should he pay every ?
h. An appliance is for sale at either cash or payable each month for the next . Money is . Which
payment scheme is lower? Explain.
References
• TEACHING GUIDE FOR SENIOR HIGH SCHOOL>General Mathematics>CORE SUBJECT
Commission on Higher Education, 2016
• THE MATHEMATICS OF INVESTMENT
William L. Hart, PhD. 1924
• https://www.thebalance.com/credit-card-interest-rates-explained-960225
GIF and Video Credits
• https://www.intellectdesig
• https://www.furnituremanila.com.ph/installment/n.com/investor/annualreport/2019/index.html
• https://www.synchronybank.com/blog/new-child-new-savings-plan/
• https://myearnup.com/
• https://excellencewithyouinmind.wordpress.com/2016/06/09/a-letter-to-a-high-school-graduate/
• http://www.eagleonedebtsolutions.com/indebted-people/
• https://giphy.com/gifs/vehicles-used-cars-mileage-xTlJqQwva46dy
• https://www.wattpad.com/736604714-teenwolf-gif-series-scott-mccall
presentation created by
Laurence N. Magdalaga