Lesson 1-Simple and General Annuities

Annuities
Annuity
TYPES
Annuity Annuity
Certain Uncertain
KINDS
Simple General
Annuity Annuity
CLASSIFICATIONS CLASSIFICATIONS
General
Ordinary Deferred General
Annuity Due Ordinary Perpetuities
Annuity Annuity Annuity Due
Annuity
Types, Kinds, and Classifications of Simple and General Annuity

Meaning of Terms:
Annuity- a fixed sum of money paid to someone at regular
intervals, subject to a fixed compound interest rate
Annuity Certain – payable for a definite duration. Begins
and ends on a definite or fixed date (monthly payment of
car loan)
Annuity Uncertain – annuity payable for an indefinite
duration (insurance); dependent on some certain event
Simple Annuity – interest compounding period is equal or
the same as the payment interval
General Annuity - interest compounding period is unequal
or not the same as the payment interval
Meaning of Terms:
Ordinary Annuity – annuity in which the regular payment
is made at the end of each payment interval
Annuity Due – annuity in which the regular payment is
made at the beginning of each payment interval
Deferred Annuity – the regular payment is not made at
the beginning nor at the end of each payment interval, but
some later date
Perpetuities – a series of regular payments which are to
run infinitely or forever (Fixed coupon payments on
permanently invested (irredeemable) sums of money are
prime examples of perpetuities.)
Meaning of Terms:
Payment interval - the time between successive payments
Term of an annuity, t - time between the first payment
interval 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
GEAR UP!
Francis decided to invest his money for future
use. He deposits ₱ 1,500 at the end of every
6 months. He had an agreement with the
company that each of his deposits will earn
interest at 6% compounded semi-annually for
3 years. How much would he have in his
account at the end of 3 years?
F = R + R(1+j) + R(1+j)2 +…+ R(1+j)n – 2 + R(1+j)n – 1
Observe that last periodic payment
n=5 accumulates for n – 1 periods. Also, the
n=4
n=3 accumulated amounts represent a
n=2 geometric sequence where the first term is
n=1
R and the common ratio is 1 + j. We can use
1 2 3 4 5 6
the formula of the first n terms of geometric
sequence to derive another formula.
F=1 500(1.03)5 = ₱1,738.91
F=1 500(1.03)4 = ₱ 1,688.26
F=1 500(1.03)3 = ₱ 1,639.09
F=1 500(1.03)2 = ₱ 1,591.35
F=1 500(1.03) = ₱ 1,545
F=1 500(1.03)0 = ₱ 1,500
F = ₱ 9,702.61
𝑎1 𝑛
(𝑟 −1)
S=
𝑟 −1
𝑛
𝑅[(1+𝑗) −1]
F= [ ]
1+𝑗 −1
𝑛
(1+𝑗) −1
F= R[ ]
𝑗
−𝑛
P = 𝐹(1 + 𝑗)
𝑛
(1+𝑗) −1 −𝑛
P =R[ ] (1 + 𝑗)
𝑗
(1+𝑗) 𝑛−𝑛 −(1+𝑗) −𝑛
P= R[ ]
𝑗
1−(1+𝑗) −𝑛
P= R[ ]
𝑗
Simple and General
Ordinary Annuities
FORMULAS:
Amount and Present Value of an Ordinary Annuity
𝑛
(1+𝑗) −1
F = R[ ]
𝑗
1−(1+𝑗)−𝑛
P=R [ ]
𝑟
𝑗
𝑁𝑜𝑡𝑒: 𝑗 = and n (total no. of payments) = kt
𝑚
k = no. of payments per year
FORMULAS:
Amount and Present Value of General Ordinary Annuity
(1+𝑖)𝑛 −1
F = R[ ]
𝑖
1−(1+𝑖)−𝑛
P=R[ ]
𝑖
𝑟
𝑁𝑜𝑡𝑒: 𝑗 = ; n (total no. of payments) = kt;
𝑚 𝑚
𝑟
i = (1+j)c – 1 or i = (1+𝑚) ) 𝑘 – 1 (Ans)
𝑛𝑜. 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑚
c= =
𝑛𝑜. 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑘
GEAR UP!
Francis decided to invest his money for future
use. He deposits ₱ 1,500 at the end of every
6 months. He had an agreement with the
company that each of his deposits will earn
interest at 6% compounded semi-annually for
3 years. How much would he have in his
account at the end of 3 years?
EXAMPLE 1:
Suppose Mrs. Corpuz would like to
save Php 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?
EXAMPLE 2:
Mel started to deposit Php 1,000
monthly in a fund that pays 6%
compounded quarterly. How
much will be in the fund after 15
years?
EXAMPLE 3:
In order to save for her high school
graduation, Marie decided to save
Php 200 at the end of each month. If
the bank pays 0.250% compounded
monthly, how much will her money
be at the end of 6 years?
EXAMPLE 4:
(Recall the problem in Example 1.)
Suppose Mrs. Corpuz would like to
know the present value of her
monthly deposit of Php 3,000 when
interest is 9% compounded monthly.
How much is the present value of her
savings at the end of 6 months?
Definition.
The cash value or cash
price is equal to the down
payment (if there is any)
plus the present value of
the installment payments.
EXAMPLE 5:
Mr. Torres paid Php 200,000 as down
payment for a car. The remaining
amount is to be settled by paying
Php 16,200 at the end of each month
for 5 years. If interest is 10.5%
compounded monthly, what is the
cash price of his car?
EXAMPLE 6:
If money is worth 9%
compounded quarterly, how
much must a man save every 3
months to accumulate Php 10,000
in 4 years?
EXAMPLE 7:
Find the monthly payment of
an ordinary annuity if the
present value is Php 12,000
with interest rate of 9%, m=12
and a term of 8 years.
EXAMPLE 8:
Ken borrowed an amount of money from
Kat. He agrees to pay the principal plus
interest by paying Php 38,973.76 each
year for 3 years. How much money did
he borrow if interest is 8% compounded
quarterly?

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Annuities

Types, Kinds, and Classifications of Simple and General Annuity

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