GENERAL ANNUITIES

AND
EQUIVALENT RATES

Q2 – WEEK 4

General Annuity

General Annuity is a General Ordinary

type of annuity in which Annuity is a general
the payment period is annuity in which the
not the same as the periodic payment is
interval period made at the end of the
(conversion period) payment interval
GENERAL ORDINARY ANNUITY

Examples of General annuity:

1. Monthly installment payment of a car loan with an interest rate that
is compounded annually.

2. Paying a debt semi-annually when the interest is compounded

monthly.

Definition of Terms

• Equivalent rates – two annual rates with

different conversion periods that will earn the
same compound amount at the end of a given
number of years
• Nominal rate – annual interest rate () may be
compounded more than once a year)
• Effective rate – the rate compounded annually
that will give the same compound amount as a
given nominal rate, denoted by ! (")
 EQUIVALENT INTEREST RATE and EFFECTIVE
RATE
1. What effective rate is equivalent to 10% compounded quarterly?
Given: ! (") = 0.10 ; ( = 4
Find: effective rate ! ($)
Solution: Since the equivalent rates yield the same maturity value, then
*$ = *%
(&
& ' (")
+ 1 + ! ($) =+ 1+
(
(") (&
!
&
1 + ! ($) = 1+
(
).$) "
1 + ! ($) = 1 +
"
! ($) = 1.025 " −
1
! ($) = 1.103812891 − 1 Hence, the effective rate equivalent to 10%
! ($) = 0.103812891 × 100 compounded quarterly is 10.38%
! ($) = 10.38%

GENERAL
ORDINARY
ANNUITY
Formula for General Ordinary Annuity
PRESENT VALUE OF GENERAL ANNUITY

23 245! "# # 9: 69;<9=>?!>@ <AB!9?C <AB DAEB

!=# 5!
6=
# 9: <ED;A>FC <AB DAEB
#
!=
FUTURE VALUE OF GENERAL ANNUITY $

"
245! # 32 #! = 1 + ! −1
$=# 5!
Example: Ben started to deposit P1,000 monthly in a fund that pays 6%
compounded quarterly. How much will be in the fund after 15 years?

Given: R = 1,000; n = 12(15) = 180 payments; i(4) = 0.06; m = 4

Find: F

The Cash Flow for this problem is shown in the diagram below.

Example: Ben started to deposit P1,000 monthly in a fund that pays 6% compounded
quarterly. How much will be in the fund after 15 years?

Given: R = 1,000; i(4) = 0.06; m = 4 1+) !−1

$=&
n = 12(15) = 180 payments )
Find: F 1 + 0.004975206 "#$ − 1
$ = 1000
0.004975206

Solution: 2.443219656 − 1
= 1000
0.004975206
(1) Convert 6% compounded
quarterly to its equivalent interest 1.4432196565
= 1000
rate for monthly payment interval. 0.004975206

(2) Apply the formula in finding the = 1000 290.0823918

future value of an ordinary annuity
$ = ₱290, 082.39
using the computed equivalent
rate.
$ !"
= 0.004975206 = /
12
Example: Ben started to deposit P1,000 monthly in a fund that pays 6% compounded
quarterly. How much will be in the fund after 15 years?

Given: R = 1,000; i(4) = 0.06; m = 4 ; n = 12(15) = 180 payments

Find: F
1 + @% ! − 1
Solution: $=&
@%
# 9: 79;<9=>?@>A <BC@9?D <BC EBFC
7= 1 + 0.004975206 "#$ − 1
# 9: <FE;B>GD <BC EBFC $ = 1000
0.004975206
"
5= 2.443219656 − 1
$%
= 1000
).)+ 0.004975206
6= "
= 0.015
1.4432196565
!% = 1 + 6 , −1 = 1000
0.004975206
"
= 1 + 0.015 $% −1 = 1000 290.0823918
= 1.004975206 − 1 $ = ₱290, 082.39
!% = 0.004975206

Example: A teacher saves ₱5,000 every 6 months in a bank that pays 0.25%
compounded monthly. How much will be her savings after 10 years?

Given: R = ₱5,000; i(12) = 0.0025;

$" = $% 1+) !−1
m=12 ; n = 2(10) = 20 payments; $=&
&#
%'
& $#
"%' )
H 1+ %
= H 1 + "%
1 + 0.001250649 &' − 1
Find: F & (#)
%
$.$$%) "%
# = 5000
1+ = 1 + "% 0.001250649
%
Solution: % 1.025312405 − 1
@ (%) "% $ = 5000
1+ = 1.000208333 0.001250649
(1) Convert 0.25% compounded 2
0.025312405
monthly to its equivalent interest & (#) $# = 5000
rate for each semi-annual payment 1+ %
= 1.000208333 # 0.001250649
interval. & (#) ,
= 5000 20.2394157
%
= 1.000208333 −1
(2) Apply the formula in finding the
future value of an ordinary annuity & (#) * = ₱101,197.08
%
= 0.001250649
using the computed equivalent
rate. ) = 0.001250649
Example: A teacher saves ₱5,000 every 6 months in a bank that pays 0.25%
compounded monthly. How much will be her savings after 10 years?

/.//!0 $%
Given: R = ₱5,000; i(12) = 0.0025; m = 12; j = ; n = 2(10) = 20 payments; 5 = =6
1! %

Find: Future value, F

1 + @% ! − 1
Solution: $=&
@%
# 9: 79;<9=>?@>A <BC@9?D <BC EBFC
7= 1 + 0.001250649 %$ − 1
# 9: <FE;B>GD <BC EBFC $ = 5000
0.001250649
$% 1.025312405 − 1
5= =6 = 5000
%
0.001250649
!% = 1 + 6 , −1
0.025312405
+ = 5000
= 1.000208333 −1 0.001250649
= 1.001250649 − 1 = 5000 20.2394157
!% = 0.001250649
$ = ₱101,197.08

Example: Ken borrowed an amount of money from Kat. He agrees to pay the principal plus
interest by paying P38, 973.76 each year for 3 years. How much money did he borrow if the
interest is 8% compounded quarterly?

GIVEN: R = 38,973.76, i(4) = 0.08,

m = 4, n = 3 payments
Find: Present Value, P

Solution:
(1) Convert 8% compounded
quarterly to its equivalent interest
rate for each payment interval.
(2) Apply the formula in finding the
present value of an ordinary
annuity using the computed
equivalent rate j = 0.082432.
CASH FLOW and
FAIR MARKET
VALUE

Cash Flow and Fair Market Value

A cash flow is a term that refers

The fair market value or
to payments received (cash
economic value of a cash flow
inflows) or payments or deposits
(payment stream) on a particular
made (cash outflows). Cash
date refers to a single amount
inflows can be represented by
that is equivalent to the value of
positive numbers and cash
the payment stream at that date.
outflows can be represented by
This date is called focal date.
negative numbers.
Mr. Ramos received two offers on a lot that he wants to sell. Mr. Ocampo has offered P50,000 and
a P1million lump sum payment 5 years from now. Mr. Cruz has offered P50,000 plus P40,000
every quarter for five years. Compare the fair market value of the two offers if money can earn 5%
compounded annually. Which offer has a higher market value?

Mr. Ocampo’s Offer Mr. Cruz’s Offer

P50,000 down payment P1,000,000 after 5 yrs. P50,000 down payment P40,000 every quarter for 5 yrs.

Find the market value of each offer.

SOLUTION: We illustrate the cash flows of the two offer using time diagram
833,526.20 − 755,572.70 = -77,953.50
END OF PRESENTATION
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