MATHEMATICS

OF INVESTMENT
By: MICHAEL T. LUMAWIG, MIM
6 ANNUITY
PERPETUITY
ANNUITY is an annuity where the term begins on a fixed date, but the
maturity is considered indefinite.
In other words, it is a kind of annuity where the first periodic payment starts on the
specific date, but its last periodic payment cannot be determined.

Since the last periodic payment or the total compounding period cannot be
determined, the future value of a perpetuity annuity is undetermined.

ORDINARY PERPETUITY DEFERRED

PERPETUITY: DUE: PERPETUITY:

Pa = Pa = + A Pa = (1+i)-m
EXAMPLE
Finding the Present value of ORDINARY PERPETUITY
45
QUESTION
: Find the present value of simple perpetuity of ₱1,000, payable at the end of
each quarter if money is worth 10% compounded quarterly.

SOLUTION
: Pa = = = ₱40,000

EXAMPLE
Finding the Present value of PERPETUITY DUE
46
QUESTION
: Find the present value of perpetuity due of ₱2,000, payable at the beginning of
each quarter if money is worth 10% compounded quarterly.

SOLUTION
: Pa = + A = + 2,000 = ₱82,000
EXAMPLE
Finding the Present value of DEFERRED PERPETUITY
47
QUESTION
: Find the present value of deferred perpetuity of ₱1,000 at 10% compounded
quarterly, if the first payment is made at the end of the 5th quarter.

SOLUTION
: Pa = (1+i)-m = (1+0.10/4)-4 = ₱36,238.03

EXAMPLE
Finding the Periodic payment of ORDINARY PERPETUITY
48
QUESTION
: Find the monthly payment at the end of each month of a simple perpetuity on
₱400,000, if money is worth 15% compounded monthly.

SOLUTION
: Pa = ;
A = Pai = 400,000(0.15/12) = ₱5,000
EXAMPLE
Finding the Periodic payment of PERPETUITY DUE
49
QUESTION
: Find the quarter payment at the beginning of every 3 months of perpetuity due
whose present value is ₱400,000, if money is 12% compounded quarterly.

SOLUTION
: Pa = + A ; 400,000 = + A ; A = ₱11,650.49

EXAMPLE
Finding the Periodic payment of DEFERRED PERPETUITY
50
QUESTION
: Find the monthly payment of a perpetuity on ₱300,000, if money is worth 15%
compounded monthly – the first monthly payment is due after two years.

SOLUTION
: Pa = (1+i)-m ; 300,000 = (1+0.15/12)-23 ; A = ₱4,990.19