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Annuities

Annuity
• A sequence of equal payments made at equal
intervals of time.
• Annuities are usually applied in payments for large
purchases, such as houses, condominiums, cars, or
insurance plans.
• Annuities classified according to when the periodic
payments are made are classified into ordinary
annuity, annuity due, and deferred annuity.
Basic Terms in Annuity
• Payment Interval - the time between two successive payment
dates.
• Term - the time from the beginning of the first payment
interval to the end of the last one; number of intervals;
number of interest period.
• Present value - value of the annuity at the beginning of it term.
• Future value - value of the annuity at the end of its term or
sum of the compound amounts of several payments
accumulated to the end of the term.
Ordinary Annuity
• Present Value
 1  i   1 
n
PV  R  n 
 i 1  i  
• Future Value
 1  i   1
n
FV  R  
 i 
Examples:
• Edith deposits ₱500 every half month for 2 years. If
interest is at 8% compounded semiannually, how much
does Edith have in the bank for 2 years?
• Find the amount of an ordinary annuity of ₱500 every
end of 3 months for 3 years at 12% compounded
quarterly.
• Mrs. Perez provided her son an education trust fund by
remitting ₱500 every month for 3 years at 16%
compounded monthly. How much will be the amount after
the last deposit.
Examples:
• Money is worth 8% compounded quarterly. What is the
present value and the amount of an annuity paying ₱1000
quarterly for 15 years?
• Mrs. Rodriguez pays ₱800 monthly for 6 years to settle her
debt. If the money is worth 12% compounded monthly,
how much was the original debt?
• Find the present value of an ordinary annuity of quarterly
payments of ₱10,000 for 2 years 8% compounded
quarterly.
Seatwork
1. Find the amount of the following ordinary annuities:
a. ₱400 a year for 12 years at 12 1/2%.
b. ₱900 a month for 6 years 3 months, at 6% compounded
monthly.
c. ₱500 per quarter 3 years 9 months, at 6% compounded monthly.
2. Bert saves ₱600 each half-year and invest it at 3% compounded
semiannually. Find his savings after 10 years.
3. Mrs. Reyes is paying ₱3060 at the end of each 6 months as the
premium on an endownment policy which will pay her ₱20000 at
the end of 5 years. How much would she have if she deposits each
payments in a savings accunt paying 3% compounded
semiannually
Seatwork
4. Find the cash equivalent of an annuity paying ₱240 at the end of
each 3 months for 10 years, assuming money worth 5%
compounded quarterly.
5. It is estimated that a stand of timber will net ₱25000 a year for the
next 10 years and that the land can then be sold for ₱15000.
Find the fair price today, money worth 6%.
6. Find the cash equivalent of an annuity paying ₱1000 at the end of
each 3 months for 15 years, assuming money worth 10%
compounded quarterly.
Periodic Payments
• Present Value PV
R
 1  i   1
n

 n 
 i 1  i  
• Future Value
FV
R
 1  i   1
n

 
 i 
Examples:
1. How much must a person save every month to accumulate
₱30,000 in 3 years if money is worth 18% compounded
monthly?
2. A man bought a sala set worth ₱18,000 and pays a
downpayment of ₱3,000 cash, and agrees to pay the rest
for 3 years by quarterly payments at 20% compounded
quarterly. Find the quartely payments.
3. Carlos Juan has ₱50,000 in a bank which he invest at 8%
compounded semiannually. What semiannual withdrawal
must be made for 3 years?
Examples:
4. In order to have ₱25,000 available on July 20, 2001, equal
quarterly deposits are to be made in a fund earning 10%
compounded quarterly. The first deposit is made on
January 20, 1999 and the last on July 20, 2001. Find the
deposit required.
5. Mr. Tolentino was given ₱30,000 six months before he
enters college which he invested at 15% compounded
semiannually. what is semiannual withdrawals will he
have for the first in 6 months, for following 5 years will
this provide?
Seatwork
1. Joey borrows ₱1,000. He agrees to pay the principal and interest
by paying a sum every 3 months for 3 years. If the interest is 16%
compounded quarterly, how much should he pay every 3 months?

2. Nora wanted to have ₱12,000 in 6 years. She made semiannual


deposits in a savings account earning an interest at 9.6%
compounded semiannually. Find the semiannual deposit.

3. Alvin bought a used car at ₱120,000. He paid ₱50,000 down


payment and paid the remainder in 18 equal monthly installments,
the first was due one month after he bought the car. If the dealer
charged 10% compound monthly, what was the monthly payment?
Seatwork
4. If money is worth 12% compounded quarterly, How much must a
person save every quarter to accumulate ₱66,000 in 3 years?

5. How much should be invested each year in a fund paying 12%


effective to accumulate ₱60,000 in 10 years?
Term of an Ordinary Annuity
• Present Value
 PVi 
log1  
 R 
n
• Future Value log(1  i )
 FVi 
log   1
 R 
n
log 1  i 
Examples:
1. How many equal payments of ₱500 at the end of each
month will be required to accumulate ₱20,000 at 12%
compounded monthly interest?
2. Jose borrowed ₱70,000 at an interest rate of 12%
compounded semiannually. He agreed to pay ₱5,000 at
the end of each 6 months until the maturity date. Give
the number of payments he is going to make to settle the
account.
Examples:
3. As soon as Aling Nena has saved ₱10,100, she intends
to invest the money. If she can save ₱500 every 3
months and invest it at 12% compounded quarterly, find
the number of ₱500 deposits she must make and the
total amount of thr final deposit.
4. How many monthly payments of ₱500 must be deposited
in the bank to accumulate ₱24,500 if the interest is
earned at 12% compounded monthly.
Seatwork
1. How many ₱2,500 at the end of each 3 months will be
required to accumulate ₱15,000 if interest is earned at
2.4% compounded semiannually?
2. Find the time for monthly installments of the following:
a. R= ₱600; FV= ₱35,000; 12% compounded monthly
b. R= ₱1,000; FV= ₱40,000; 16% compounded quarterly
c. R= ₱3,000; PV= ₱12,000; 16% compounded monthly
d. FV= ₱40,000, R= ₱1,500; 12% compounded quarterly

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