Lesson 6 - Deferred Annuity

Engr. Brylle Reovince Rosales

MITL
Deferred Annuity
• Annuity in which periodic payment () is
neither at the beginning nor end of each
payment interval but some later date.
• Deferment Period is the length of time for
which there are no payments.
• First payment occur after the deferment
period.
 Present Value of a Deferred Annuity
• The value of the annuity at point 0
• Compute the present value () of the ordinary
annuity of the payments of at point
• Discount for periods

– number of payments made

– number of payments missed

[ ]
−𝑛
1 − ( 1+𝑖 ) −𝑑
𝑃 𝑑= 𝐴 ( 1+𝑖 )
𝑖
 Present Value of a Deferred Annuity
• Difference between the present value of the assumed
and actual payments and the present value of the
assumed payments

()

– number of payments made

– number of payments missed

[ ]
−( 𝑑+𝑛 ) −𝑑
1 − ( 1+𝑖 ) 1− ( 1+𝑖 )
𝑃 𝑑= 𝐴 −
𝑖 𝑖
Amount of a Deferred Annuity
Example 4.5 (Sullivan, 2006)

During your first job, you opened an account having an interest

rate of 8% per year wherein you made annual deposits of
$5,000. Five years later, you moved into a new job and opened
another bank account. How much can you withdraw from the
first account 35 years later?
SOLUTION
n=5
a) Solve for Pd using A.
d=0 F40
P0

19963.55

0 1 2 3 4 5 … 40

b) Solve for Fd using P0. n=5 $5,000

d = 35

$433,698.58
ALTERNATIVE SOLUTION 1

a) Solve for P0 using A. F40

P0

$5,000

0 1 2 3 4 5 … 40
b) Solve for F40 using P0.
$5,000
ALTERNATIVE SOLUTION 2

a) Solve for F5 using A. F5 F40

$5,000

0 1 2 3 4 5 … 40
b) Solve for F40 using F5.
$5,000
Example 4.6 (Sullivan, 2006)

A series of eight monthly deposits of P5,000 will start

on the fifth month. If the interest rate is 2% per
month, determine the present and future value of
these cash flow.
ALTERNATIVE SOLUTION n = 12 months
P0 F12
a) Solve for F12 using A.

P5,000
0 1 2 3 4 5 6 7 8 9 10 11 12

b) Solve for P0 using F12. P5,000

n = 8 months
i = 2% per month
Find the present value of a deferred annuity of P900 every three
months for 5 years that is deferred for 3 years, if money is worth
10% compounded quarterly.
F32
P0 = ?
Year 1 Year 2 Year 3 Year 4 Year 5

0 1 … 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32
n = 20

P900
a) Solve for F32 using A.

P900

b) Solve for P0 using F32.

Find the present value of a
deferred annuity of P4,800 every
six months for 7 years, if the first
payment is made in 4 years, and
money is worth 11%
compounded semi-annually.
2. Find the quarterly payment for 21 quarters to discharge an
obligation of P120,000 if money is worth compounded quarterly
and the first payment is due at the end of 3 years and 9 months.
Assignment #5

1. Find the present value of an annuity of P33,000 payable at

the end of each year if the first payment is made at the end of
3 years and the last payment is made at the end of 9 years.
Assume money is worth 10% effective.

2. Find the quarterly payment for 21 quarters to discharge an

obligation of P120,000 if money is worth compounded quarterly
and the first payment is due at the end of 3 years and 9 months.
In a series of quarterly payments of
P5,700 each, the first payment is due at
the end of 5 years and the last at the end
of 10 years and 9 months. If money is
worth 6% compounded quarterly, find the
present value of the deferred annuity.
Find the present value of 10 semiannual
payments of P3,000 each if the first
payment is due at the end of years and
money is worth 12% compounded
semiannually.
Find the present value of a P4,500
annuity payable annually for 7 years
and is deferred for 2 years if money is
worth 8% effective.
A house costs P1.3 million cash. A buyer
bought it by paying P300,000 down
payment and would pay 48 monthly
installments, the first of which is due at
the end of 1 year. If the rate of interest is
20.4% compounded monthly, what is the
monthly installment?
1. An investment of P5,500 is made at the beginning of
each month for 5 years and 5 months. If interest is 15%
compounded monthly, how much will the investment be
worth at the end of the term?

2. Polly purchased a car. He paid P 150,000 as a down

payment, and P 5,500 payable at the beginning of each
month for 48 months. If money is worth 12%
compounded monthly, what is the equivalent cash price
of the car?

3. Pompei will pay off a debt of P 120,000 by equal

payments every beginning of each quarter for 10 years.
If interest is charged at 11% compounded quarterly,
what will be the size of each payment?
4.Find the present value of a series of quarterly
payments of P 950 each, the first payment is
due at the end of 2 years and 3 months, and
the last at the end of 5 years and 6 months, if
money is worth 15% compounded quarterly.

5.Find the monthly payment for 36 periods to

discharge an obligation of P88,000, if money
is worth 12%, m=12 and the first payment is
due at the end of 1 year and 3 months.