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Welcome to General Mathematics!
 CHECK-IN ACTIVITY

Where do people pay by

installment?
 Module 12:

Annuities
Concepts, Characteristics, Classifications, and Types
 Learning Objectives
At the end of this module you will be
able to
• discuss the basic concepts of annuities;
• distinguish varieties of annuities;
• illustrate simple and general annuities;
• find the future value and present value of simple
annuities and general annuities; and
• calculate the fair market value of a cash flow stream
that includes an annuity.
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01 03

04

Definition of 05

Terms 06
 Definition of terms
Annuity - a sequence of payments made at equal (fixed)
intervals or periods of time.
  - the sum of compound amounts of each payment.
Payment interval - the time between successive payments.
Term of an annuity (t) - time between the first payment
interval and last payment interval.
Regular or Periodic payment (R) - the amount of each
payment
 Definition of terms
Amount (Future Value) of an annuity (F) - sum of future
values of all the payments to be made during the entire term
of the annuity.

Present value of an annuity (P) - sum of present values of

all the payments to be made during the entire term of the
annuity.
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02 03

04

Characteristics 05

06
 Characteristics
1. Continuous. Annuity payments are without
interruption or breaks from the beginning through to
the end of the annuity's term.

2. Equal. The annuity payments must be in the same

amount every time from the beginning through to the
end of the annuity's term.
 Characteristics

3. Periodic. Annuity payments must always have the

same payment interval from the beginning through to
the end of the annuity's term.
4. Specified Period of Time. The annuity payments must
occur within an identifiable time frame that has a
specified beginning and a specified end.
 Characteristics

CONTINUOUS EQUAL

PERIODIC SPECIFIED
PERIOD
OF TIME
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Classification
04

and Types
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06
 According to Payment Interval
Simple Annuity
An annuity where the payment interval is the same as the
interest period

General Annuity
An annuity where the payment interval is not the same as
the interest period
 According to the Time of Payment
Ordinary Annuity (or Annuity Immediate)
A type of annuity in which the payments are made at the end of
each payment interval.

Annuity Due
A type of annuity in which the payments are made at beginning of
each payment interval.

Deferred Annuity
An annuity where payments are made at the end of each payment
interval, with the first payment made on a later date.
 According to Duration
Annuity Certain
An annuity in which payments begin and end at
definite times.

Contingent Annuity
An annuity in which the payments extend over an
indefinite (or indeterminate) length of time.
 Exercise:
Identify the Type of Annuity
1) Mr. Forger enrolls his daughter Anya in an
Educational Plan (EdPlan). He pays Php 3,000 at the
end of each three months. In return, the EdPlan deposits
the payments in a bank which pays 10% compounded
monthly.

General
Annuity
 Exercise:
Identify the Type of Annuity

2) On Anya’s grade school graduation, Mr. Forger

enrolled her in the Educational Plan (EdPlan). He pays
Php 3,000 at the end of each three months for five
years. In turn, the EdPlan deposits the payments in a
bank which pays at 15% compounded quarterly.
Annuity
Certain
 Exercise:
Identify the Type of Annuity

3) Monthly telephone bills, monthly electric bills, and

house rentals.

Ordinary
Annuity
 Exercise:
Identify the Type of Annuity

4) Death insurance plan.

Contingent
Annuity
 Exercise:
Identify the Type of Annuity

5) Insurance payments, healthcare premiums, and school

bus fees

Annuity Due
 Exercise:
Identify the Type of Annuity
6) Monthly car plans where the first payment is made
after 6 months, or quarterly house and lot installments
with the first payment made after 2 years.

Deferred
Annuity
 Exercise:
Identify the Type of Annuity
7) Mr. Forger enrolls his daughter Anya in the Educational
Plan (EdPlan). He pays Php 3,000 at the end of each three
months. In turn, the CEP deposits the payments in a bank
which pays at 12% compounded quarterly.

Simple
Annuity
 01

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04 03

Simple VS. 04

General 05

Annuities 06
 Simple and General Annuities
Both simple and general annuities have a time diagram for
its cash flow as shown below. The main difference is that in
a simple annuity the payment interval is the same as the
interest period while in a general annuity the payment
interval is not the same as the interest period.
 Simple and General Annuities
Example of a simple annuity - Installment payment for
an appliance at the end of each month with interest
compounded monthly.
Example of a general annuity - Installment payment for
an appliance at the end of each month with interest
compounded annually.
Note:
Unless mentioned otherwise, all annuities discussed in this lesson are
ordinary annuities. That is, the regular payments are assumed to be
done at the end of the payment period.
 Module 10.2

Ordinary Simple
Annuity
 Ordinary Simple Annuity
[Simple Annuity Immediate]
An ordinary simple annuity has the following
characteristics:
• Payments are made at the end of the payment
intervals, and the payment and compounding
frequencies are equal.
• The first payment occurs one interval after the
beginning of the annuity.
• The last payment occurs on the same date as the end
of the annuity.
Example:
Most car loans are ordinary simple annuities where
payments are made monthly and interest rates are
compounded monthly. As well, car loans do not
require the first monthly payment until the end of the
first month.
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02
02

03

Future Value of 04

Ordinary Simple 05

Annuity 06
 Future Value of Ordinary Simple Annuity

Where, The expression

R – is the regular payment is usually denoted by the symbol
j - is the interest rate per period (this is read as ‘s angle n’)
n – is the number of payments
 Example #1
Louise started to deposit P5,000 every three months in a fund
that pays 1% compounded quarterly. How much will be in the
fund after 6 years? Solution:
Given:

Thus, the amount in the fund after 6

years is
 Example #2
In order to save for her 18th birthday celebration, Andrea
decided to save P100 at the end of each month. If the bank
pays 5% compounded monthly, how much will her money be
at the end of 3 years? Solution:
Given:

Hence, Andrea will be able to save for

her birthday.
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02

03 03

Present Value of 04

Ordinary Simple 05

Annuity 06
 Present Value of Ordinary Simple Annuity

Where, The expression

R – is the regular payment is usually denoted by the symbol
j - is the interest rate per period (this is read as ‘a angle n’)
n – is the number of payments
 Example #1
To pay for his debt at 12% compounded quarterly, Renz
committed for 8 quarterly payments of P28,491.28 each. How
much did he borrow?
Given: Solution:

Thus, he borrowed Php 200,000.02

 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 #2
The buyer of a lot pays P50,000 cash and P10,000 every
month for 10 years. If money is 8% compounded monthly,
how much is the cash value of the lot?
Given: Solution:
Cash Value = Down Payment + Present Value

The cash value of the lot is P874, 214.81

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QUESTIONS?