CHAPTER 6: ANNUITY

INTRODUCTION

 Definition: A series of equal payments made at equal intervals time.

 Example: Shop rental, insurance policy premium, annual dividends received, installment payments
and loan repayments.
 The payments are made at the end of each payment period.
 The interest and payments periods are of the same interval.
 The first and last payments are fixed.

FUTURE VALUE/ACCUMULATED VALUE OF ANNUITY

 Definition: The sum or total of all the future values of the periodic payments.
 It must at the end of period.
 Formula:

 k
mt

 1    1
 1  i   1
n
m k
S  R   S  R  i and n  mt
 i   k  m
 
 m 

I  S  nR

S  Future Value/Acc umulated Value/Sum of Annuity/T otal Amount (in RM)

R  Periodic Payments (in RM)
i  Periodic Interest Rate (in %)
n  Term of Investment /Saving/Lo an/Debt

1
Example 1: Exercise 1:

RM350 was deposited every month into an Hakim invested RM50 every month in an account
account at 6% compounded monthly for 10 years. that pays 6% interest compounded monthly. Find
Find the accumulated amount and the interest the accumulated amount after 5 years of saving
earned. and the interest earned.

Solution: Solution:

 k mt 
 (1  m )  1
S  R 
 k 
 m 
  0.06 12(10) 
 1    1
12 
 350   
 0.06 
 
 12 
 RM 57,357 .77

I  S  mtR
 57,357 .77  12(10 )(350 )
 RM15,357 .77
Example 2: Exercise 2:

RM 200 is deposited every six months for 2 years Suhaila deposited RM 500 every 3 months for 10
at 8% compounded semi-annually. Find the years into a saving account that paid interest 7%
amount saved just after the last deposit and the compounded quarterly. Find the amount saved just
interest earned. after the last deposit and the interest earned.

Solution: Solution:

 k mt 
 (1  m
)  1
S  R 
 k 
 m 
 0.08 
2( 2)

 1    1
 2 
 200 
 0.08 
 
 2 
 RM 849.29
I  S  mtR
 849 .29  2( 2)( 200 )
 RM 49 .29

2
Example 3: Exercise 3:

Azni deposited RM100 every 2 months for 40 Hajjar invested RM 500 every month in an account
months into her account at 8% compounded every that pays 18% compounded monthly. After four
2 months. After 40 months, no more deposit was years, no more deposit was made. Find the amount
of the account at the end of five years and the
made. Find the amount in the account at the end
interest earned.
of 5 years.
Solution:
Solution:

  40 
6   

 1 0 . 08 
 1
 12 
  6 

Sannuity  100    2274 .80
 0.08 
 6 
 
mt
 k
Scompound  P 1  
 m
 20 
6  
 0.08   12 
 2274 .80 1  
 6 
 2596 .97

I  S  mtR
  40  
 2596.97   6 100
  12  
 RM 596.97

3
Example 4: Exercise 4:

Azizi invested RM 100 every 4 month for 5 years Azizi invested RM 100 every month for 5 years in an
in an investment scheme. He was offered 12% investment scheme. He was offered 10%
compounded every 4 months for the first 3 years compounded every month for the first 2 years and
and 18% compounded every 4 month for the rest
12% compounded every month for the rest of
of period. Find the accumulated value at the end
of five years. Hence determine the interest period. Find the accumulated value at the end of five
earned. years. Hence determine the interest earned.

Solution: Solution:

 k mt 
 (1  m )  1
 k
mt
S4  R    1  
 k  m
 m 
 0.12 
3( 3 )

 1    1 3 2 
  3    0.18 
 100 1
 0.12  3 

 
 3 
 RM1,501 .19

 k mt 
 (1  m )  1
Srest of period  R  
 k 
 m 
 0.18 
3( 2 )

 1    1
3 
 100   
 0.18 
 
 3 
 RM1697 .53

Accumulated
value=1,501.19+1,697.53=RM2,198.72

I  S  mtR
 2,198 .72  3(5)(100 )
 RM 698 .72

4
PRESENT VALUE/DISCOUNTED VALUE OF ANNUITY

 Definition: The sum of all the present values of the periodic payments.
 It must at t  0 .
 Formula:

  k
( mt )

1  1   
1  1  i n    m  k
A  R   AR i and n  mt
 i   k  m
 
 m 

I  nR  A

A  Present Value/Dis counted Value of Annuity (in RM)

R  Periodic Payments (in RM)
i  Periodic Interest Rate (in %)
n  Term of Investment /Saving/Lo an/Debt

Example 1: Exercise 1:

Fahmi has to pay RM 200 every 3 month for 2 Rizal borrows RM X from Maybank for his business
years to settle a loan at 12% compounded capital. He is required to pay RM 585 monthly for 5
quarterly. Determine the original value of the years. If the bank charges interest at the rate of 9%
loan and the total interest that he has to pay. compounded monthly, find X and the interest
charged.
Solution:
Solution:
  k
( mt )

1  1   
m
A  R   
 k 
 
 m 
 4 2 
  0.12  
1 - 1   
  4  
 200
 0.12 
 
 4 
 RM1,403 .94

I  nR  A
 mtR  A
 4(2)200  1,403 .94
 RM196 .06

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Example 2: Exercise 2:

A director plans to withdraw RM 500 at the end Muiz plans to withdraw RM 100 at the end of every
of every 3 months for 6 years beginning three two months for 4 years beginning two months from
months from now. If the interest offered by the now. If the interest offered by the bank is 4.5%
bank is 4% compounded quarterly, find the compounded every two months, find the amount
amount that he should deposit now and the total that he should deposit now and the total interest he
interest he will be earning. will be earning.

Solution: Solution:

  k 
 ( mt )

1  1   
m
A  R  
 k 
 m 
 
 4 6 
  0.04  
1 - 1   
  4  
 500
 0.04 
 4 
 
 RM10,621 .69

I  nR  A
 mtR  A
 4(6)500  10,621.69
 RM 1,378.31

Example 3: Exercise 3:

Kiran bought a new car for RM80,000 with 25% Suraya bought a new car for RM55,000 with 10%
down payment. He took a loan from a bank at an down payment. He took a loan from a bank at an
interest rate of 5% compounded monthly to interest rate of 3.5% compounded monthly to settle
settle the balance and had to pay RM691.04 the balance and had to pay RM665.27 every month
every month for nine years. Find the value of the for 7 years. Find the value of the loan and the total
loan and the total interest charged. interest charged.
Solution: Solution:

DP  0.25  80000  20000

Amount of the loan  80000 20000
 60000  A

I  total payment  loan

I  mtR  A
 129 691.04  60000
 74,632.32  60000
 14,632.32

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SOLVING FOR PERIODIC PAYMENT/REGULAR PAYMENT, R

 Q: Find the semi-annual payment.

Find amount to be invested every 3 months.
Find monthly payment.

Example 1: Exercise 1:

Ahmad borrowed RM65,500 from ABC bank Fatin made a loan of RM 25,000 from a bank. Bank
for 4 years at 4% compounded every three charges an interest rate of 6% compounded
months. Find the quarterly payment. semiannually with semi-annual payments of 5 years.
Find the semi-annual payment.
Solution:
Solution:
  k
 ( mt )

1  1   
  m 
AR
 k 
 m 
 
  0.04 
 4( 4 )

1  1   
  4  
65500  R
 0.04 
 4 
 
R  RM 4,450 .37
Example 2: Exercise 2:

When Aqeef was born 7 years ago, his father If interest is 10% compounded every 6 month, how
deposited an equal amount of money at the much should be deposited at the end of every 6
end of every month in an account which pays months so that the amount accumulated after 6 years
5.65% monthly. If the accumulated amount is is RM 25,000.
RM5,137.16. Calculate the amount that his
father deposited ever month. Solution:

Solution:
 1  i n  1
S  R 
 i 
127 
 0.0565  
 1    1
12 
5,137 .16  R   
 0.0565 
 
 12 
R  RM 50

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SOLVING FOR NUMBER OF PAYMENTS, n AND TIME, t:

 It must use log or lg or ln.

 Q: Find the number of payment.
How many monthly payment?
How long the payment?

Example 1: Exercise 1:

Naqib has to pay RM443.21 every month to settle a Amira invested RM50 every month in an account
loan of RM10,000 at 6% compounded monthly. that pays 6% interest compounded monthly. After
Find the number of payments he has to make. several years, her bank statement showed an
accumulated amount of RM3,488.50. Find the
Solution: number of investment she has made.
  k
( mt )
 Solution:
1  1   
  m 
AR
 k 
 
 m 
  0.06   n 
1  1   
12  
10,000  443 .21 
 0.06 
 
 12 
n
 0.06 
1    0.88718661
 12 
1.005  n  0.88718661
lg 0.88718661
n
lg 1.005
n  24 payments

8
Example 2: Exercise 2:

Naqib has to pay RM443.21 every month to settle a Ali plans to get married in several years of time. He
loan of RM10,000 at 6% compounded monthly. estimates that the cost of the wedding will be
How long it takes to settle the payments? RM25,000 then. If he deposits RM150 every month
in an account that pays 7% compounded monthly,
Solution:
how long it will take to have enough money for his
wedding?
  k
( mt )

1  1    Solution:
  m 
AR
 k 
 
 m 
  0.06  12( t ) 
1  1   
  12  
10,000  443 .21
 0.06 
 
 12 
12t
 0.06 
1    0.88718661
 12 
lg 0.88718661
12t  
lg 1.005
t  2 years

Example 3: Exercise 3:

Suraya bought a car that cost RM45,000. The cost

will be paid using a loan with interest of 4% Syakirah bought a new car for RM80,000 with zero
compounded monthly for 7 years. downpayment. He took a loan from a bank at an
interest rate of 5% compounded monthly to settle
i) Find the monthly payment for the loan.
the payment for 9 years.
Solution:
i) Find the monthly payment for the loan.
 k mt  Solution:
1  (1  m ) 
A  R 
 k 
 m 
 0.04 (12)( 7 ) 
1  (1  12 ) 
45,000  R  
 0.04 
 12 
R  RM 615.10

9
ii) If Suraya intends to settle the loan by making ii)After paying for seven years, he wants to
a single payment immediately after 6 years, settle the loan in full. Find the outstanding
find the amount of single payment. principal balance.
Solution:
Solution:

 k mt 
 1  (1  m ) 
A  R 
 k 
 m 
 0.04 (12)(1) 
1  (1  12 ) 
A  615.10 
 0.04 
 12 
 RM 7,223.73

iii) If Suraya missed the first 4 monthly payments, iii) If Syakirah missed the first 4 monthly
what is the outstanding arrears on her fifth payments, what is the outstanding arrears
payment? on her fifth payment?

Solution: Solution:

 k 
mt

 1    1
m
S  R 
 k 
 
 m 
  5 
12  
 1  0.04   12   1
 12  
 615 .10   
 0.04 
 12 
 
 3,096 .07

10