Chapter 4

Ordinary Simple Annuity

Learning Objectives:
 Determine and explain the classification of annuity based on: Term,
Payment Schedule, Interest period and payment interval
 Define the basic terms involved with ordinary simple annuity.
 Describe and distinguish ordinary simple annuity.
 Compute the future value, present value, periodic payment, term and
periodic interest, rate, given values, of other quantities for an ordinary
annuity.
 Find the equivalent cash price of an annuity.
 Derive the formula of an ordinary simple annuity.
 Give examples of an ordinary simple annuity problem in real life situation.
Chapter Outline:
4.1 Introduction
4.2 Basic Concepts
4.3 Computing the Future Value of an Ordinary simple Annuity.
4.4 Computing the present value of an Ordinary Simple Annuity.
4.5 Computing the Periodic Payment of an Ordinary Simple Annuity.
4.6 Computing the Term of an Ordinary Simple Annuity.
4.7 Computing the Interest of an Ordinary Simple Annuity.
 An annuity is a series of equal payments at regular
intervals. Clearly, a significant portion of both personal and
business expenditures and receipts from annuities. The
significance of annuities warrants a careful coverage of the
theory and applications in this and the succeeding chapters.
This chapter will discussed the main type of annuities
and some of the terminology of annuities. Many
applications of annuities involve a single amount or
payment that is economically comparable to an annuity. In
other words, these applications involve the present value or
future value of an annuity. This chapter shows how to
calculate the future value, present value, periodic/regular
payment, term of the loan and interest rate of an ordinary
simple annuity in different applications.
 A. Classification of Annuity
based on Term
1. Contingent Annuities are annuities with no fixed
number of payments but depend on an uncertain time
periods.
2. Annuities Certain are annuities that have stated
beginning and ending dates or have a specified number
of time periods.
3. Perpetuity is an annuity in which the periodic
payments begin on a fixed date and continue
indefinitely. It is sometimes referred to as a perpetual
annuity.
 B. Classification of Annuity based on
Payment Schedule
1. Ordinary Annuity is an annuity that is paid or receive at the
end of the time period.
2. Annuity Due is an annuity that is paid or receive at the
beginning of time period.
3. Deferred Annuity is an annuity in which the first payment is
delayed or deferred for a period of time.
C. Classification of Annuity based on Interest
Period and Payment Interval
4. Simple Annuity is an annuity in which the number of
compounding periods per year coincides with the number of
annuity payments per year.
5. General Annuity ( Complex Annuity) is an annuity in which the
annuity payment and compounded periods do not coincides.
 4.2 Basic Concepts
Payment Interval – the length of time between successive
payments in an annuity.
Term of the Annuity – the total time from the beginning of
the first payment interval to the end of the last payment
interval.
Periodic Rent – the periodic annuity payment.
Future Value of an Annuity- the sum of the compound
amount of all payments, compounded to the end of the
term.
Present Value of Annuity – the lump sum required at the
beginning.
Time Diagram for an n-Payment
Ordinary Annuity
Interval number

0 1 2 3 4 n-2 n-1 n
-------------
R R R R R R R
Payment Size
The following variables will be in our mathematical treatment
of ordinary simple annuity:
Sn = Future value of an n-payment ordinary simple annuity.
An = Present value of n-payment ordinary simple annuity
R = Size of each annuity payment
j = Nominal interest rate
m = Number of conversion per year
t = Time period(term) of the loan or investment
n = Number of payment in the annuity
i = Interest rate per compounding period
Ordinary Simple Annuity Formula
 4.3 Computing the Future Value
of an Ordinary Simple Annuity
Derivation of the Future Value Formula
The future value of n-payment ordinary simple
annuity at the end of the term is the sum of the future
values of all the individual payments that make up the
annuity.
R(1+i)n-1 = Future value of the first payment
R(1+i)n-2 = Future value of the second payment
R(1+i)n-3 = Future value of the third payment
R(1+i)n-4 = Future value of the fourth payment

R(1+i)2 = Future value of the third to last payment

R(1+i)1 = Future value of the second to last payment
R = Future value of the last payment
The future value of Sn of the annuity is
Sn =R(1+i)n-1+R(1+i)n-2+R(1+i)2+R(1+i)1+R
If the annuity contains many payments, this procedure of
computing and adding the future values of all the individual
payments becomes very difficult and time-consuming. We
would much prefer a more compact and efficient
formulation. We will multiply both sides of the equation by
(1+i).
(1+i)Sn = R(1+i)n+R(1+i)n-1+R((1+i)n-2+…+R(1+i)2+R(1+i)1
Then we will subtract the equation of S n from the equation
for (1+i)Sn, we will arrive with the simplified equation.
Example:
Cecilia Antonis has been contributing P460 at the end of each
quarter for the past 18 querters to a saving plan that earns 9%
compounded quarterly. What amopunt will she accumulate if
she continues with the plan for another year?
The amount that will be accumulated is the future
value, Sn, of the contributions:
4.4 Computing the Present Value of
an Ordinary Simple Annuity
Derivation od the Present Value Formula
The present value of n-payment ordinary simple annuity
at the end of the term is the sum of the present values of all of
the individual payments that makes up the annuity.
R(1+i)-1= Present value of the first payment
R(1+i)-2 = Present value of the second payment
R(1+i)-3 = Present value of the third payment
R(1+i)-4 = Present value of the fourth payment

R(1+i)-n+2 = Present value of the third to last payment

R(1+i)-n+1 = Present value of the second to last payment
R(1+i)-n = Present Value of the last payment
The Present Value of an Annuity
 Take note that the present value An of an annuity will
also equal to the present value, n periods earlier, of a single
payment to Sn. Using Formula 3-2 in the form

P= F we have An = Sn
(1+i)n (1+i)n

Then use Formula 4-1 to substitute for Sn.

Example:
Determine the present value on July 7 of P6,800 paid at the end
of each subsequent calendar quarter for 7 yrs. if money is worth
6% compounded quarterly.
 4.5 Computing the Periodic
Payment of an Ordinary Simple
Annuity
Example:
To accumulate P85,250, Amy Antonis needs to place
equal deposits at the end of every 3 mos. In a fund which earns
at 18% compounded quarterly. If the first deposit is made on
March 28,2014 and the last, on March 28,2020, how large should
each deposit be?
Solution
Given:
Sn = P85,250 j= 18%=0.18 t= 6 yrs.
m= 4 n= tm+1=6(4)+1=25 i= j/m = 0.18/4=0.045
 Let us examine the computation of time (n),
from March 28,2014 to March 28,2020 covers a 6 yrs.
period. Amy started to make her quarterly deposits on
March 28,2014 so we need to add 1 quarter period to
time (n).

R= Sni Formula 4-3

(1+i)n-1
= 85,250(0.045)
(1+0.045)25-1
= 3,836.25
2.005434457
= 1,912.92714
= P1,912.93
 B. Derivation of the Periodic Payments
based from Present Value Formula
Example:
Armando Antonis sold a piece of property for P1,300,000. A
down payment of P500,000 was made and the remainder
was to be repaid in equal quarter installments, the first due 3
mos. After the date of sale. The interest was 15% compounded
quarterly, and the debt was to be amortized in 7 yrs.
a. What quarterly payment is required?
b. What will be the total amount of payment?
c. How much interest will be paid?
d. What is the total cost of the property?
Solution
Given: Cash Value= P1,300,00 Down Payment
j= 15%=0.15 t=7 yrs. m=4
n=tm=7(4)=28 i=j/m=0.15/4=0.0375
Present Value = Cash Value-Down Payment = 1,300,000-
500,000=P800,000
a. Periodic Payment
R= Ani
1-(1+i)-n
= 800,000(0.0375)
1-(1+0.0375)-28
= 30,000
0.6432754085
= 46,636.3242
= P46,636.32
The debt will be paid off in 7 yrs. by quarter installment of
P46,636.32
b. Total Payments = periodic Payment x No. of payments
=46,636.32 x 28
= P1,305,816.96
The total amount of payments is P1,305,816.96
c. Interest = Total periodic payments – Original Loan
= 1,305,826.96-800,000
= P505,816.96
The interest will amount to P505,816.96
d. Total Cost = Down Payment + Total Periodic Payments
= 500,000+1,305,816.96
= P1,805,816.96
The total cost of the property is P1,805,816.96
4.6 Computing the Term of an Ordinary Simple Annuity

A. Derivation of the Time based from Future

Value Formula
We are going to use Formula 4-1 to derive the
formula of time when the future value is given. Then we
will arrive with this solution
Then apply the properties of logarithmic to obtain
the value for n, which is
Example:
How long will it take for annual year-end
contributions of P57,000 to an Educational Savings Plan to
grow to P1,000,000 if the Education Savings Plan earns 13%
compounded annually?
Solution
Given:

Sn = P1,000,000 R=P57,000 j= 13%=0.13

m= 1 i= j/m=0.13/1=0.13
Since there is just one payment per year, it will
take 12 yrs. to accumulate P1,000,000. The last
contribution will be less than P57,000.
B. Derivation of the Time based from Present Value
Formula
We are going to use Formula 4-2 to derive the
formula of time when the present value is given.
Then we will arrive with this solution,
Then apply the properties of logarithmic to
obtain the value for n, which is
4.7 Computing the Interest Rate
of an Ordinary Simple Annuity
A. Derivation of the Interest Rate based from
Present Value Formula.
We are going to use Formula 4-2 to derive the
interest rate formula of an ordinary simple annuity.
Then let f (i) = An or f (i) = (1+i)-1 +(1+i)-2+(1+i)-3+…+(1+i)-n
R
Since the function f and its derivatives of all orders exist at I =
0, the expansion of the function of f in powers of I will obtain a
Maclaurin Series, which takes the form of f (i).
f (i)= f(0) + f’’(0)i + f’’(0)i2 + f’’(0)i3+…fn(0)in+… Equation A
1! 2! 3! n!
The expansion of f is illustrated below:
f (i) = (1+i)-2+(1+i)-2+(1+i)-3+…+(1+i)-n
f(0)= 1+1+1+…+n or n times
The first derivative of the function is
f’(i)= -(1+i)-2-2(1+i)-3-(1+i)-4-…-n(1+i)-(n=1), the let I = 0
f’(0)= -1-2-3…-n= -n(n+1)
2
The second derivative of the function is
f”(i)=2(1+i)-3+6(1+i)-4+12(1+i)+5+…+n(n+1)(1+i)-(n+2),
Then let i =0
f’’(0)= 2+6+12+…+n(n+i)
f”(0)= 1(1+1)+2(2+1)+3(3+1)+…+n(n+1)
Therefore, substitute f(0), f’ (0), f’’(0) in Equation A, the Maclaurin Series expansion of
function f in powers of I will be obtain:
f(0)= n – n(n+1)I +n(n+1)(n+2)i2 -…
2! 3!
Therefore, An and R can be written in power of I as
R An
We will use An and obtain its reciprocal R. Both of the
R An
series coverges, but R series coverges more rapidly than A n
An R
series, it implies that R series obtain reasonably close
An
approximation of i.
We will eliminate the third and the higher powers of
i, and since An equation, can be reduced to a
R
quadratic equation in i, thus,
Then we will represent the obtained equation in the form of
general quadratic equation ax2+bx+c=0, where I takes the
value of x.
n2-1 n+1 nR
i2 + i+1 =0
12 2 An
Example:
A loan of P8,838.51 is to be discharged by making 15
semiannually payments of P940 each. At what rate
compounded semiannually is the interest charged on
the loan?
Solution
Given:
An= P8,838.51 R=P940 n=15 m=2
B. Derivation of the Interest Rate based from Future
Value Formula
We will apply the same approach to derive the
formula of the interest rate of an ordinary simple annuity
wherein Sn is given. The formula will arrive in the form of:
Example:
Payments of P300 each made every year. At what rate
compounded monthly will these payments amount to
P8,336.42 in 2 yrs.?
 Then solve the value of a, b, and c of the quadratic
equation.
Consider only the negative square root to generate a
positive result.

138-123.6186497
i=
1,150
= 0.01250552196
= 0.0125 or 1.25%

Note that j = mi=12(1.25%)=15%. Therefore, the interest

rate is 15%.
 Section 4.3 Exercise
Solve the following:
1. Teresita Cadauan deposits P600 every 3 mos. For 4 yrs. If the interest is at 8%
compounded quarterly, how much does Teresita Cadauan have in the bank for 3 yrs.?
2. Find the amount of an ordinary annuity of P375 every 6 months payable for 5 yrs.
and 6 mos., if money is worth 9% compounded semiannually.
3. Find the amount of a P42,000 ordinary annuity payable quarterly for 4 yrs. Money is
worth 16% converted quarterly.
4. Fe Pangilinan deposits P10,300 every end of 6 mos. In an account paying 8½%
interest compounded semiannually. What amount is in the account at the end of 5
yrs.?
5. Determine the amount of an ordinary annuity of P975 each quarter payable for 7 yrs.
and 9 mos., if money is worth 12% compounded quarterly.
6. Deposits of P1,850 each are needed at the end of every 2 mos. for 4 yrs. At 18%
compounded bimonthly, find the accumulated amount using the annuity formula.
7. Calculate the future value of an ordinary annuity consisting of bimonthly payments
of P7,430 for 7 yrs. if the rate of interest was 12.6% compounded bimonthly for the
three yrs. and will 10.8 % compounded bimonthly for the last for yrs.
8. Carrissa has already accumulated P250,000 in her retirement plan. If she contributes
P8,000 at the end of every quarter for the next eight yrs. and P7,000 per quarter for
the next 7 yrs., what amount will she have at the end of 15 yrs.? Assume her plan will
earn 6.8% compounded quarterly.
 Section 4.4 Exercise
Solve the following:
1. Find the present value of an ordinary annuity 0f P1,230 payable montly for 2 yrs. and 6
months if money is worth 18% compounded monthly.
2. To buy a certain item ,one must pay P3,400 every quarter for 3 yrs. if interest is at 15%
compounded quarterly, find the equivalent cash price using the annuity formula.
3. A car was purchased under these terms: P130,000 down payment and P13,700 each
month for 5 yrs. If money is worth 9% compounded monthly, find the cash price of the
car.
4. How much must be deposited now in a bank paying 13% compounded semiannually if it
is desired that a semiannually withdrawal 0f P5,200 can be made for 5 yrs.
5. Edward Cariaga pays P4,800 quarterly for 6 yrs. to settle his debt. If money is worth 12%
compounded quarterly, how much was the original debt?
6. Ruth purchased a house. If she paid P350,000 as down payment and promised to pay
P21,000 every month for the next 25 yrs. and the rate of interest charge is 18%
compounded monthly, what is the cash value of the house?
7. The PCSO lottery offers the winner a choice between a P11,250,000 cash prize or
quarterly payments of P280,000 beginning in three months and continuing for 20 yrs.
Which alternative should the winner pick if money is worth 8.2% compounded quarterly?
8. The monthly payment of six-year loan with interest at 15.3% compounded monthly is
P36,000. What was the originall principal amount of the loan?
 Section 4.5 Exercise
1. What sum must be deposited every 2 mos. In a fund paying 12% compounded
bimonthly in order to have P250,000 in 7 yrs.?
2. A borrows P75,000. He agrees to pay the principal and interest by paying a sum each
year for 3 yrs. Find his annual payment if he pays interest at 12.6% compounded
annually.
3. Christina Rodriguez bought a smart TV that cost P110,000. She paid P25,000 as down
payment and paid the balance in 12 monthly equal payments. If money is worth 12%
compounded monthly , find the monthly payment.
4. A watch cost P14,300. It is purchased with a down payment of P5,000 and 6 monthly
payments. If money is worth 15% compounded monthly, find the monthly payment.
5. If money is worth 14% compounded quarterly, how much must be deposited every 3
months in a fund in order to have P500,000 at the end of 15 yrs.
6. A man borrowed P750,000 from the SSS, in the form of real estate loan, with interest
at 12% compounded bimonthly, repayable in equal bimonthly installments for 15 yrs.
Find bimonthly payment, R.
7. Rosana obtained a P3,600,000 home improvement loan from their bank at an interest
rate of 10.6% compounded semiannually. What is the size of the blended semiannually
payments required to pay off the loan in 12 yrs.?
8. The interest rate charged on a P470,000 loan is 12% compounded monthly. Compute
the monthly payments and the total interest paid during the life of the loan if the loan
is to be paid off over 15 yrs.
 Section 4.6 Exercise
1. As soon as Joffrey Yu has save P100,000, he intends to invest the money. If he can
save P5,700 every 3 months and invest it at 15% compounded quarterly, find the
number of P5,700 deposits he must make and the total amount of the final deposit.
2. A P35,000 debt bears interest at 9% compounded bimonthly. It is to be repaid in
bimonthly payments of P1,300 each. How many payments must the debtor make?
How much will be the final payment if it is made two months after the last
payment?
3. Elmer Martin wants to accumulate P300,000 by depositing P10,000 in a fund at the
end of each month. The fund pays 18% converted monthly. How long will it takes to
do this and what should he deposit on the month of his last deposit?
4. How many monthly payments of P1,500 must be deposited in the bank to
accumulate P60,000 if the interest is earned at 10.8% compounded monthly? How
much would be the first payment if it is made 1 month after the last P1,500 deposit?
5. If P970,000 accumulated in a retirement saving plan is used to purchase an annuity
earning 6.6% compounded bimontly and paying P22,500 every two months, what
will be the term of the annuity?
6. H0w long will it take monthly payments of P37,400 to pay off P860,000 loan if the
monthly compounded rate of interest on the loan is 10.2%?
 Section 4.7 Exercise
1. At what rate compounded quarterly is P4,250 the present value of
an annuity of P70,000 at the end of each quarter for 3½ years?
2. Determine the interest rate compounded annually at which the
P8,200 payment every year will amount P90,000 in 8 years.
3. What is the rate compounded quarterly of an annuity of P3,100
payable at the end of each quarter for 4 yrs. if its present value is
P49,000.
4. An air conditioning unit can be purchased for P20,000 or P5,000
down payment and an installment of P1,000 every two months for
3 yrs. Find the interest rate compounded bimonthly.
5. If P450,000 will purchased a 15 yrs. annuity paying P8,700 per
month what rate of interest compounded monthly will the funds
invested in the annuity earn?
6. If regular quarterly deposits of P9,000 in a savings account
amounted to P350,000 after 4 yrs. what interest rate compounded
quarterly was paid on the account?
 Chapter Exercise
A. Complete the information below using Ordinary Simple Annuity.
1.R=_____ An=_________ Sn=_______ j=8%
t=______ m=4 i=_______ n=32

2. R=4,120 An=_________ Sn=_______ j=_____

t=______ m=12 i=0.75% n=48

3. R=_____ An=_________ Sn=6,518.40 j=11%

t=2 yrs. m=2 i=_______ n=_____

4. R=_____ An=30,170.51 Sn=_______ j=12%

t=3 yrs. m=12 i=_______ n=____

5. R=_____ An=_________ Sn=32,428.45 j=4%

t=_____ m=6 i=_______ n=36
6. R=_____ An=_________ Sn=P12,797.45 j=4%
t=______ m=4 i=1.75%____ n=16
7. R=P555 An=_________ Sn=_______ j=12%
t=5 yrs. m=12 i=_______ n= ____
8. R=_____ An=P42,087.28 Sn_______ j=5%
t=______ m=2 i=_______ n=14
9. R=_____ An=P87,294.28 Sn_______ j=6%
t=______ m=6 i=_______ n=54
10. R=P1,450 An=_________ Sn_______ j=____
t=______ m=12 i=0.25% n=120
B. Solve the following
1. A water dispenser costs P7,000. It is purchased with adown
payment of P1,100 and 6 bimonthly payments. If money is worth
9% compounded bimonthly, find the bimonthly payment.
2. Determine the present value of an ordinary annuity of P2,7000
each quarter payable for 4 yrs. and 9 mos., if money is worth 11%
compounded quarterly.
3. Emalou will settle a debt by paying P850 quarterly for 4 yrs. What
is the outstanding debt if money is worth 12.3% compounded
quarterly.
4. What must be deposited every 3 mos. In a fund paying 11.4%
compounded quarterly in order to have P25,000 in 7 yrs.?
5. Francis Nicolas borrowed P100,000 at an interest rate of 14%
compounded semiannually. He agreed to pay P7,500 at the end
of each 6 months until the maturity date. Give the number of
payments he is going to make to settle tha account.
6. To accumulate P250,000, Marisol needs to place equal deposits at
the end of every 6 mos. In a fund which earns at 18% compounded
semiannually. If the first deposit is made on January 5, 2015 and the last,
January 5,2020, how large should each deposit be?
7. Emelita bought a house and lot worth 2.3 million pesos. She gave a
down payment of P700,000 with an agreement to pay the balance for
15 yrs. at 17% compounded quarterly. How much was the quarterly
payment?
8. What sum will be paid at the end of every month for 5 yrs. and 6
months if the present value of P45,000 and interest are paid at 15%
compounded monthly?
9. An appliances which sells for P51,800 may be purchased for P5,000
down payment and the balance in equal monthly payments for 1 yr. and
3 months. At 15.6% compounded monthly, determine the monthly
payment and the total interest charged.
10. Efren Marana deposits no P300,000 in a bank paying 13.8%
converted quarterly. He wishes to make quarterly withdrawals of
P40,000 from his account starting three months after the deposits date
for his expenses. How many regular withdrawals of P40,000 he make?
11. Find the sum of an ordinary annuity of P1,200 payable
monthly for yrs., if money is worth 18% compounded monthly.
12. A sofa set is offered for sale for P13,200 down payment and
P2,500 every month for the balance for 1 yr. If interest is to be
computed at 12.3% compounded monthly, what is the cash
equivalent of the sofa set?
13. An annuity contract pays P35,000 quarterly for 16 yrs. What
is the present value of the annuity three months before the fist
payment if money can earn 13.2% compounded quarterly?
14. If money can earn 12.6% compounded monthly for the next
25 yrs., what is the economic value today if P4,500 is paid at the
end of each month?
15. What is the appropriate price to pay for the contract
guaranteeing monthly payments of P7,150 for the next 14 yrs. if
you require a rate of return of 6.6% compounded monthly?
16. What must be the size of quarterly payments lasting for
13 yrs. if they have a value of P680,000 when discounted at
11.4% compounded quarterly?
17. What monthly payment discounted at 9.6% compounded
monthly will have a current value of P840,000 if the
payment run for 15 yrs.?
18. Calculate the amount that must be invested
semiannually at 8.6% compounded semiannually in order to
accumulate P1,300,000 after 20 yrs.?
19. How long will it take to pay off P436,000 loan with
monthly payments of P16,780, if the interest rate on the
loan is 15.6% compounded monthly?
20. If regular monthly deposits of P3,850 in a saving account
amounted to P105,000 after 2 yrs., what interest rate
compounded monthly was paid on the account?