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The document provides an overview of annuities, defining them as series of equal payments made at regular intervals. It classifies annuities into certain and uncertain types, and further divides certain annuities into simple and general categories. The document also explains ordinary annuities, their characteristics, and includes examples and activities for solving annuity-related problems.

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10 views15 pages

module6A

The document provides an overview of annuities, defining them as series of equal payments made at regular intervals. It classifies annuities into certain and uncertain types, and further divides certain annuities into simple and general categories. The document also explains ordinary annuities, their characteristics, and includes examples and activities for solving annuity-related problems.

Uploaded by

arlo.gacang.coc
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We take content rights seriously. If you suspect this is your content, claim it here.
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ANNUITIES (ORDINARY ANNUITY)

Lesson Objectives:

At the end of the lesson, you should be able to:

1. Define Annuity
2. Give classifications and types of annuities
3. Solve problems in annuity
ANNUITY

An annuity is a series of equal payments made at equal intervals of time.


Financial activities like installment payments, monthly rentals, life-insurance
premium, monthly retirement benefits, are familiar examples of annuity.

Annuity can be certain or uncertain. In annuity certain, the specific amount of


payments are set to begin and end at a specific length of time. A good example
of annuity certain is the monthly payments of a car loan where the amount and
number of payments are known. In annuity uncertain, the annuitant may be
paid according to certain event. Example of annuity uncertain is life and
accident insurance. In this example, the start of payment is not known and the
amount of payment is dependent to which event.
Annuity certain can be classified into two, simple annuity and general annuity. In
simple annuity, the payment period is the same as the interest period, which
means that if the payment is made monthly the conversion of money also occurs
monthly. In general annuity, the payment period is not the same as the interest
period. There are many situations where the payment for example is made
quarterly but the money compounds in another period, say monthly. To deal with
general annuity, we can convert it to simple annuity by making the payment period
the same as the compounding period by the concept of effective rates.
ELEMENTS OF ANNUITY
A = amount of periodic payment
P = present amount of all periodic payments
F = future worth of all periodic payments after the last payment is made
i = interest rate per compounding period
n = total number of payments
m = nominal rate (see compounded interest)
t = number of years
CLASIFICATION OF ANNUITY
Simple annuity - Payment period is the same as the interest period. If the
payment is made monthly then the conversion of money also occurs monthly

General annuity - Payment period is not the same as the interest period however
it can be converted to simple annuity by making the payment period is the same
as the compounding period by concepts of effective rates

TYPES OF ANNUITY
- Ordinary Annuity
- Deferred Annuity
- Annuity Due
- Perpetuity
ORDINARY ANNUITY
In ordinary annuity, the payment is made at the end of each period starting
from the first period as in the diagram below.
Characteristics of ordinary annuity
P - present equivalent value, occurs one interest period before the first A
(uniform amount)
F - future equivalent value, occurs at the same time as the last A and n intervals
after P
A - annul equivalent value, occurs at the end of each period

Remember that the


exponent n in the
numerator is the
number of payment
that has made and
the exponent in the
denominator is the
number of period
from F to P
Example 1: What is the present worth of P 10,000 at the end of every three
months for 5 years if the interest rate is 12% compounded quarterly?
Example 2: If money is worth 10% compounded quarterly, what monthly savings
is required monthly in order to have P200,000 at the end at the end of 10 years
Solution: The example problem is a general annuity where the payment period is
not the same to the interest period, so we must find the equivalent rate of
compounded quarterly to compounded monthly

Now we have the value for the interest


period, for the number of payment is equal
to number of period
n = 12(10) = 120
Example 3: An engineer wants to start a business which requires purchase of a
Php 100,000 worth machine which will produce a net income of Php 11,000 per
year after deducting operating expenses. The engineer plans to put the machine
on sale after 4 years, what must be the resale price to justify the investment if
the engineer should make 12% annual return on the investment.
Solution: Create a cash flow-diagram for this problem
To solve the given problem we must compute first for all future amount of
annuity and of machine at 4th year, then we have inflow equal to outflow
Activity 3
1. A contractor bought a concrete mixer at P120,000 if paid in cash. The mixer may
also be purchased by installment to be paid within 5 years. If money is worth 8%
compounded annually, the amount of each annual payments are made at the end of
each year.
2. How much money you must invest today in
order to withdraw P1,000 per year for 10 years.
If the interest rate is 12%
3. Naruto deposits P5,000 at the end of every earning 7.50% compounded
continuously. Determine the worth of his money after 15 years.
Activity 5
Mitsuha inherited regular endowment of P100,000 every end of 3 months for
10 years. However, she may choose to get a single lump sum if the end of 4
years. How much is this lump sum if the cost of money is 14% compounded
quarterly
Seat Work
1. A service car whose cash price was P540,000 was bought with a down
payment of P162,000 and monthly of P10,874.29 for five year. What was
the rate of interest compounded monthly
2. A corporation will make the following disbursements:
a. Php 50, 000 on December 31, 1991
b. Php 100,000 on December 31, 1992
c. Php 200,000 one December 31, 1993
To accumulate these sums, a sinking fund(annuity) is established by making
equal year-end deposits starting December 31, 1986 up to the end of 1993. If
the fund earns 9% interest compounded annually, what is the required amount
of the annual deposit?

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