ANNUITIES

OBJECTIVES
1 Illustrate simple and general annuities

2 Distinguish between simple and general annuities

3 Find the future and present value of simple annuity

 ANNUITY
It is a sum of money
payable yearly or at
other regular intervals.
CLASSIFICATION OF ANNUITIES
According to payment interval and interest period
SIMPLE ANNUITY GENERAL ANNUITY
AN ANNUITY WHERE THE PAYMENT AN ANNUITY WHERE
INTERVAL IS THE SAME AS THE INTEREST THE PAYMENT INTERVAL IS NOT THE SAME
PERIOD AS THE INTEREST PERIOD

According to time of payment

Ordinary Annuity Annuity Due
A TYPE OF ANNUITY IN WHICH THE A TYPE OF ANNUITY IN WHICH THE PAYMENTS
PAYMENTS ARE MADE AT THE END OF ARE MADE AT THE BEGINNING OF EACH
EACH PAYMENT INTERVAL PAYMENT INTERVAL

According to duration
ANNUITY CERTAIN CONTINGENT ANNUITY
AN ANNUITY IN WHICH PAYMENTS BEGIN AN ANNUITY IN WHICH THE PAYMENTS
AND END AT DEFINITE TIME EXTEND OVER INDEFINITE LENGTH OF TIME
 DEFINITIONS
It is the time between the first
Term of annuity (t)- payment interval and last payment.

PAYMENT INTERVAL- It is the time between successive payments.

(monthly, quarterly, semiannually, annually,
etc.)
REGULAR OR PERIODIC
The amount of each payment
PAYMENT (R)-

AMOUNT (FUTURE VALUE) The sum of future values of all the

payments to be made during the entire
OF AN ANNUITY (F)- term of the annuity.

PRESENT VALUE OF AN The sum of present values of all the

payments to be made during the entire
ANNUITY (P) - term of the annuity.
SIMPLE ANNUITY
It is an annuity in which the
EXAMPLE #1
A parent contributes ₱300 at the end of
payment interval is equal to the
each month into a college savings plan
compounding period.
with a 4% annual interest rate
compounded monthly. The plan runs for
10 years.

EXAMPLE #2
An investor buys bonds that pay ₱500
semiannually with an interest rate of 7%
compounded semiannually for a total of
6 years.
GENERAL ANNUITY
It is an annuity in which the
EXAMPLE #1

payment interval is different A traveler saves ₱1,500 monthly for a

from the compounding period. vacation fund that yields 4% interest per
year, compounded quarterly, for 2
years.

EXAMPLE #2
An individual deposits ₱5,000 at the end
of each year into a retirement account
that earns 6% annually, compounded
monthly, for 20 years.
 SOLVING PROBLEMS
INVOLVING SIMPLE AND
GENERAL ANNUITIES
FORMULAS TO BE USED
IN SIMPLE ANNUITIES
FUTURE VALUE OF SIMPLE ORDINARY ANNUITY (F):
(1 + j)ⁿ−1
𝐹 = 𝑅 —————— j

PRESENT VALUE OF SIMPLE ORDINARY ANNUITY (P):

1 – ( 1 + j )-ⁿ
P = 𝑅 –————— j

PERIODIC PAYMENT (R) OF AN ANNUITY:

F P
————— —————
𝑅 = (—————
1+j)ⁿ−1 𝑅 = 1—————
_
–(1+j) ⁿ
j j
WHERE:

F–future value
R–periodic payment
P –present value
n–number of conversion periods for the whole term (mt)
j –nominal rate per conversion period i^m /m)
 Example #1
Keia intends to save ₱3,000 at the end of each year for 6
years to renovate her home. If her savings account earns an
annual interest rate of 5% compounded annually, what will
be the total amount at the end of the 6 years?
Solution:
Step 1 : Identify what is asked.
a. Future Value (simple Ordinary Annuity) ₱3,0
Step 2 : Identify the given.
₱3,000
R =_________________ i ^ m =___________________
5% or 0.05
m =_________________
1 j = i ^ m / m =____________________
0.05
t =___________________
6 n = t × m =___________________
6×1=6
 STEP 3 : Identify which formula is to be used.
Future Value (Simple Ordinary Annuity)
n
(1 + j) -1
F = R ——————
j
Step 4 : Substitute the given values to the formula, then solve.
Future Value (Simple Ordinary Annuity)
6
(1 + 0.05) -1
F = 3,000 ————————
0.05
F = ₱20,405.74

Therefore, the total amount will be ₱20,405.74 at the

end of 6 years.
 EXAMPLE #1
Nabi wants to save for a vacation and plans to receive
₱9,000 at the end of each quarter for 3 years. If she
expects an interest rate of 8% quarterly, how much
should she invest today to achieve her goal?
Solution:
Step 1 : Identify what is asked.
a. Present Value (simple Ordinary Annuity)
Step 2 : Identify the given.
₱9,000
R =_________________ i ^ m =___________________
8% or 0.08
m =_________________
4 j = i ^ m / m =____________________
0.08/4 = 0.02
t =___________________
3 n = t × m =___________________
3 × 4 = 12
STEP 3 : Identify which formula is to be used.
Present value (simple ordinary annuity)
-n
1-(1+ j)
P = R ———————
j
Step 2 : Substitute the given values to the formula, then solve.
Present value (simple ordinary annuity)
-12
1-(1+ 0.02)
P = 9,000 ———————
0.02
P = ₱95,178.07
Nabi should invest ₱95,178.07 today to receive ₱9,000 at
the end of each quarter for 3 years at an interest rate of
8% quarterly.
 DEFINITIONS
–an annuity in which the payment interval differs from the
General annuity compounding interval.

Ordinary general annuity –is a general annuity in which payments are

made at the end of the payment period with
different payment interval and compounding
interval.
– is a general annuity in which payments are made at
General annuity due the beginning of the payment period with different
interval and compounding interval.

–is the amount of money needed to invest today to receive a

Present value series of payments for a given number of years in the future.

Future value –is the future amount of series of payments plus interest.

Payment interval can be made to coincide with the interest by finding the
number of periods in each payment interval.
Notations to be used in General Annuities
P –present value of annuity
F –future value
R –periodic/regular payments
t –term
m –number of compounding period for one year
n –total number of compounding periods for the whole term (t x m)
j –rate per compounding period (i/m)
i^m –interest rate
c –number of months in a compounding period
p –number of months in a payment interval
k –number of compounding periods in agiven payment interval (p/c)
 Formulas

PRESENT VALUE PRESENT VALUE

-n -n

[ ] [
1-(1+j)
]
1-(1+j)
P = R ——————k
P = R —————— -k
(1+j) -1 1-(1+j)

FUTURE VALUE FUTURE VALUE

n n
(1 + j ) -1
[ ] [ ]
(1 + j ) -1
F = R —————— k
F = R —————— -k
(1 + j ) -1 1 -(1 + j )
 EXAMPLE #1
A college student, Heyi, wants to save for a new car after
graduation. She starts a savings plan by depositing ₱250 every
month into a savings account that pays 3% interest compounded
quarterly. How much will she have saved after 3 years?
Solution:
Step 1 : Identify what is asked.
a. Future Value (Ordinary General Annuity)
Step 2 : Identify the given.
₱250
R =_________________ j = i / m =____________________
0.03 / 4 = 0.0075
m =_________________
4 p =___________________
1
t =___________________
3 c =___________________
3
n = (tm)=___________________
3 × 4 = 12 ⅓
k=___________________
i =___________________
3% or 0.03
STEP 3 : Identify which formula is to be used.
Future Value (Ordinary General annuity)
(1 + j )n -1
[
F = R —————— k ]
(1 + j ) -1
Step 4 : Substitute the given values to the formula, then solve.
Future Value (Ordinary General annuity)
12
(1 + 0.0075 ) -1
[
F =250 ————————— ⅓
(1 + 0.0075 ) -1
]
F = ₱ 9,404.10

Therefore, Heyi will have save ₱9,404.10 after 3

years
 EXAMPLE #1
Radji dreams of traveling the world in 5 years. She plans to
withdraw ₱15,000 at the beginning of each month for a year to
cover her expenses. If her savings account earns 6% interest
compounded monthly, how much should she save now?
Solution:
Step 1 : Identify what is asked.
a. Present value (General Annuity Due)
Step 2 : Identify the given.
₱15,000
R =_________________ j = i / m =____________________
0.06 / 12 = 0.005
m =_________________
12 p =___________________
12
t =___________________
5 c =___________________
1
n = (tm)=___________________
5 × 12 = 60 k=___________________
12 / 1 or 12
i =___________________
6% or 0.06
 STEP 3 : Identify which formula is to be used.
a. Present value (General Annuity Due)
-n
1-(1+j)
[
P = R ——————
1-(1+j)
-k ]
Step 4 : Substitute the given values to the formula, then solve.
a. Present value (General Annuity Due)
1-(1+0.005)
-60

[
P=15,000 ———————-12
1-(1+0.005) ]
P=₱6,677.75
Radji should save approximately ₱6,677.75 now in order to withdraw
₱15,000 at the beginning of each month for a year, given a 6% annual
interest rate compounded monthly.
 Credits:
EDITOR

PHOEBE KATE FAJILAN

FINANCIAL SUPPORT (LOAD)

SUNSHINE JADE GALOSO

BILLY JANZEN MANIPOL
Ryan fadriquela
Rendell Motin
Nathan famadulan
Colbie naturaliza
 Credits:
EDITOR

PHOEBE KATE FAJILAN

FINANCIAL SUPPORT (LOAD)

SUNSHINE JADE GALOSO

BILLY JANZEN MANIPOL
Ryan fadriquela
Rendell Motin
Nathan famadulan
 ANK YOU
TH !