ILLUSTRATION

OF SIMPLE
AND GENERAL
ANNUITIES
Prepared by: Ms. Alna Jane B. Sangat
• Both simple and general annuities have a time
diagram for its cash flow as shown below. The
main difference is that in a simple annuity the
payment interval is the same as the interest period
while in a general annuity the payment interval is
not the same as the interest period.
Example of a simple annuity:
➢Installment payment for an appliance at the
end of each month with interest compounded
monthly.

Example of a general annuity

➢Installment payment for an appliance at the
end of each month with interest compounded
annually.
Definition
of Terms
• Annuity a sequence of payments made at equal (fixed)
intervals or periods of time.

• Payment interval the time between successive payments.

• Term of an annuity (t) time between the first payment and

last payment interval.

• Regular or Periodic payment (R) the amount of each

payment.

• Amount (Future Value) of an annuity (F) sum of future

values of all the payments to be made during the entire term
of the annuity.
Present value of an annuity (P) sum of present values of all the payments
to be made during the entire term of the annuity.

Examples of annuity :
Installment basis of paying a car, appliance, house and lot, tuition fee, etc.

Examples of contingent annuity :

Life insurance, pension payments

Simple Annuity (Time Diagram)

• General Annuity an annuity where the payment interval is not the same
as the interest compounding period.

• General Ordinary Annuity a general annuity in which the periodic

payment is made at the end of the payment interval.

Example of Annuity:
Monthly installment payment of a car, lot or house with an interest rate that
is compounded annually; paying a debt semi-annually when the interest is
compounded monthly.

• General Annuity (Time Diagram)

FINDING THE FUTURE VALUE
AND PRESENT VALUE OF BOTH
SIMPLE AND GENERAL
ANNUITIES
Lesson 3
Computing Future Value of Simple Annuity
𝑛
1+𝑗 −1
𝐹=𝑅
𝑗

Where:
R = regular payment
j = interest rate per period
n = number of payments
Example 1.
Suppose Mrs. Remoto would like to save ₱3, 000 at
the end of each month, for six months, in a fund that gives
9% compounded monthly. How much is the amount or
future value of her savings after 6 months?

R = 3, 000
n = 6 months
Interest rate per annum = i = 9% o r 0.09
Number of conversions per year (m) = 12
𝑖 0.09
Interest rate per period(j) = = = 𝟎. 𝟎𝟎𝟕𝟓
𝑚 12
Find the amount (future value) at the end of the term (F)
Add all the future values obtained from the previous step.
3, 000 = 3, 000

3, 000 (1+0.0075) = 3, 022.5

3, 000(1 + 0.0075)2 = 3, 045.169

3, 000(1 + 0.0075)3 = 3, 068.008

3, 000(1 + 0.0075)4 = 3, 091.018

3, 000(1 + 0.0075)5 = 3, 114.20

Total F= ₱18, 340.90
 Or
Given: 1+𝑗 𝑛−1
𝐹=𝑅
R = 3, 000 𝑗
n = 6 months 1 + 0.0075 6 − 1
𝐹 = 3000
Interest rate per annum 0.0075
= i = 9% o r 0.09 1.0075 6 − 1
𝐹 = 3000
Number of conversions 0.0075
per year (m) = 12 1.045852 − 1
𝐹 = 3000
Interest rate per 0.0075
𝑖 0.09 0.045852
period(j) = 𝑚 = = 𝐹 = 3000
12 0.0075
𝟎. 𝟎𝟎𝟕𝟓 𝑭 = ₱18, 340.80
Solve example 2:

Matt would like to save ₱4, 100 at the end of

each month, for 5 months, in a fund that gives 7.5%
compounded semi-annually. How much is the
amount or future value of her savings after 5
months?
COMPUTING PRESENT
VALUE OF SIMPLE
ANNUITY
Computing Present Value of Simple Annuity
−𝑛
1− 1+𝑗
P=𝑅
𝑗

Where:
R = regular payment
j = interest rate per period
n = number of payments
Example 1: (Recall the previous example)
Suppose Mrs. Remoto would like to know the present value
of her monthly deposit of ₱3, 000 when interest is 9%
compounded monthly. How much is the present value of her
savings at the end of 6 months?

R = ₱3, 000
n = 6 months
Interest rate per annum = i = 9% o r 0.09
Number of conversions per year (m) = 12
𝑖 0.09
Interest rate per period(j) = 𝑚 = = 𝟎. 𝟎𝟎𝟕𝟓
12

Find the present value P

Add the discounted payments to get the present value.
3, 000(1 + 0.0075)-1 = 2, 977.667

3, 000 (1+0.0075)-2 = 2, 955. 501

3, 000(1 + 0.0075)-3 = 2, 933. 500

3, 000(1 + 0.0075)-4 = 2, 911. 663

3, 000(1 + 0.0075)-5 = 2, 889. 988

3, 000(1 + 0.0075)-6 = 2, 868.474

Total P= ₱17, 536.79
 Or
1− 1+𝑗 −𝑛
Given: P= 𝑅
𝑗
R = 3, 000
1− 1+0.0075 −6
n = 6 months P = 3000
Interest rate per annum 0.0075
1− 1.0075 −6
= i = 9% o r 0.09 P = 3000
Number of conversions 0.0075
1−0.956158
per year (m) = 12 P = 3000
0.0075
Interest rate per 0.043842
𝑖
period(j) = 𝑚 =
0.09
= P = 3000
12
0.0075
𝟎. 𝟎𝟎𝟕𝟓 P = ₱17, 536.80
Solve example 2:

Matt would like to know the present

value of his monthly deposit of ₱4, 100
when interest is 7.5% compounded semi-
annually. How much is the present value
of his savings after 5 months?
 COMPUTING THE
FUTURE VALUE OF
GENERAL ANNUITY
 The amount or future value of general annuity is
given by
𝑚2
𝑟 𝑚1 1+𝑗 𝑛−1
𝑗 = 1+ −1 𝐹=𝑅
𝑚2 𝑗
𝑛 = 𝑚1 𝑡
Where:

R is the regular payment m1 is the payment interval

j is the equivalent interest rate per payment interval m2 is the length of compounding period
n is the number of payments t is the term of annuity
r is the nominal rate
Example 1. (4)
Mel started to deposit ₱1, 000 monthly in a fund that
pays 6% compounded quarterly. How much will be in
the fund after 15 years?

Given:
R= ₱1, 000 𝑟 = 0.06
m1 = 12 𝑛 = 𝑚1 𝑡
m2 = 4 𝑛 = (12)(15)
t = 15 𝑛 = 180
(1) Since the payment are monthly, the interest rate of 6%
compounded quarterly must be converted to its equivalent
interest rate that is compounded monthly.

𝑚2
𝑟 𝑚1 4
𝑗 = 1+ −1 𝑗 = 1.015 −1
12
𝑚2
4 𝑗 = 1.004975 − 1
0.06 12
𝑗 = 1+ −1 𝑗 = 0.004975
4
4
𝑗 = 1 + 0.015 12 −1
(2) Apply the formula in finding the future value of an
ordinary annuity using the computed equivalent rate

1+𝑗 𝑛−1
𝐹=𝑅
𝑗 1.443130
1 + 0.004975 180 − 1 𝐹 = 1000
𝐹 = 1000 0.004975
0.004975
1.004975 180 − 1 𝐹 = ₱290 076.38
𝐹 = 1000
0.004975

2.443130 − 1
𝐹 = 1000
0.004975
Solve example 2:

Lisa started to deposit ₱2, 500 every 4 months

in a fund that pays 4% compounded semi-
annually. How much will be in the fund after
12 years?
 COMPUTING THE
PRESENT VALUE OF
GENERAL ANNUITY
 Computing the Present Value of General Annuity
𝑚2 −𝑛
𝑟 𝑚1 1− 1+𝑗
𝑗 = 1+ −1 P=𝑅
𝑚2 𝑗
𝑛 = 𝑚1 𝑡
Where:

R is the regular payment m1 is the payment interval

j is the equivalent interest rate per payment interval m2 is the length of compounding period
n is the number of payments t is the term of annuity
r is the nominal rate
Example 1
Ken borrowed an amount of money from Kat. He agrees to
pay the principal plus interest by paying ₱38,973.76 each year for
3 years. How much money did he borrow if interest is 8%
compounded quarterly?
Given:
R= ₱38, 973. 76
r = 0.08
𝑚1 = 1
𝑚2 = 4
t = 3 years
𝑛 = (𝑚1 ) t = 1 3 = 3 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
Find: present value P
(1)Convert 8% compounded quarterly to its
equivalent interest rate for each payment interval
𝑚2
𝑟 𝑚1
𝑗 = 1+ −1 4
𝑚2 𝑗 = 1.02 −1
4
0.08 1 𝑗 = 1.082432 − 1
𝑗 = 1+ −1
4
4 j = 0.082432
𝑗 = 1 + 0.02 −1
(2) Apply the formula in finding the present value of an
ordinary annuity using the computed value of j=0.082432.
−𝑛
1− 1+𝑗
P=𝑅
𝑗

1 − 1 + 0.082432 −3 0.211506
P = 38, 973. 76 P = 38, 973. 76
0.082432 0.082432
−3 P = 38, 973. 76(2.565824)
1 − 1.082432
P = 38, 973. 76
0.082432 P = ₱99, 999.81
1 − 0.788494
P = 38, 973. 76
0.082432
Example 2
A sala set is for sale at ₱16, 000 in cash or on monthly
installment of ₱2, 950 for 6 months at 12% compounded semi-
annually. Which is lower: the cash price or the present value of
the installment term?
Given:
R= ₱2, 950
r = 0.12
𝑚1 = 12
𝑚2 = 2
6
t = 12 = 0.5
𝑛 =(12) 0.5 = 6 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
Find: present value P
(1)Convert 8% compounded quarterly to its
equivalent interest rate for each payment interval
𝑚2
𝑟 𝑚1
𝑗 = 1+ −1 2
𝑚2 𝑗 = 1.06 12 −1
2
0.12 12
𝑗 = 1+ −1 𝑗 = 1.009759 − 1
2
2 j = 0.009759
𝑗 = 1 + 0.06 12 −1
(2) Apply the formula in finding the present value of an
ordinary annuity using the computed value of j= 𝟎. 𝟎𝟎𝟗𝟕𝟓𝟗.
−𝑛
1− 1+𝑗
P=𝑅 0.056605
𝑗 P = 2, 950
0.009759
1 − 1 + 0.009759 −6
P = 2, 950 P = 2, 950(5.800287)
0.009759
−6
P = ₱17, 110.85
1 − 1.009759
P = 2, 950
0.009759
Answer:
1 − 0.943395 The cash price is lower than the
P = 2, 950 present value of the installment
0.009759
term.
 Prepared by:
Alna Jane B. Sangat, LPT

Prepared by:
Alna Jane B. Sangat, LPT