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SIMPLE

ANNUITIES
MATN02G
Group-01

SIMPLE ANNUITIES
Annuity
- sequence of equal payments made at equal
intervals of time. The intervening time between
consecutive payments called the payment interval,
the value of each payment is the periodic payment,
denoted by R, whereas the period from the first
payment to the last one is called the term of the
annuity.
- in annuity that pays P300 every month for 2
years, the payment interval is 1 month, the term
of annuity is 2 years and the periodic payment, R,
is P300.

SIMPLE ANNUITIES
Two Classifications of Annuity
a. Annuity Certain
- an annuity in which payments begin and end on
a definite or fixed date. Installment payments form
an annuity certain.

b. Annuity Uncertain or Contingent Annuity


- is one whose payments extends over a period
of time the length of which cannot be foretold
accurately. Pension and periodic life insurance
premium payments form an annuity certain.

SIMPLE ANNUITIES
Three Kinds of Annuity Certain
1. Ordinary Annuity
- an annuity in which payments are made at
the end of each payment interval.

P xx

P xx

P xx

P xx

5
P xx

SIMPLE ANNUITIES
Three Kinds of Annuity Certain
2. Annuity Due
- annuity in which payments are made at the
beginning of each period.

0
P xx

P xx

P xx

P xx

P xx

5
-

SIMPLE ANNUITIES
Three Kinds of Annuity Certain
3. Deferred Annuity
- annuity in which the last payment does not
begin immediately nor at the end of the first
period but at some later time.
- the length of time from the present to the
beginning of the first payment interval is called
period of deferment.

P xx

P xx

5
P xx

AMOUNT AND PRESENT VALUE


OF ORDINARY ANNUITY
Amount of Ordinary Annuity (S)
- sum of the compound amounts of
the several payments each accumulated
at the end of the term.

P xx

P xx

P xx

P xx

P xx
P xx
P xx
P xx
P xx
P xx

S= P xx

FORMULAS AMOUNT OF
ORDINARY ANNUITY

S = RS

n i

S=R

(1+i) n - 1
i

AMOUNT AND PRESENT VALUE


OF ORDINARY ANNUITY
Present Value of Ordinary Annuity (A)
- sum of the present values of several
payments, each discounted to the beginning of
the term.

P xx
P
P
P
P
P

xx
xx
xx
xx
xx

P xx

P xx

P xx

P xx

P xx

FORMULAS PRESENT VALUE


OF ORDINARY ANNUITY

A = RA

n i

A=R

1 - (1+i) -n
i

EXAMPLES
Example 1:
Find the amount and present value of an
annuity of P550 payable monthly for 2
years and 3 months if money is worth
12% compounded monthly.

EXAMPLES
Given:
R = P550
i = 12% -------------------comp. monthly --- (12%/12)= 1%
n = 2.25 years ---comp. monthly----(2.25*12)= 27
periods
S= ?
A= ?
S = 550

S = 550S
27

0.01

(1+0.01) 27 - 1
.01

S = 550 (30.82089)

S = 550 (30.82089)

S = P 16,951.49

S = P 16,951.49

EXAMPLES

A = Ra

A = 550
27 0.01

A = 550
(23.559608)

A = P 12,957.78

1 - (1+0.01) -27
.01

A = 550 (23.559608)

A = P 12,957.78

EXAMPLES
Example 2:
You wish to save money on a regular basis
to finance an exotic vacation in 5 yeas.
You are confident that, with sacrifice and
discipline, you can force yourself to
deposit P1,000 annually at the end of
the next 5 years, into a savings account
paying 7% annual interest find what will
be the balance of your saving account
at the end of five years.

EXAMPLES
Given:
R = P1,000
I = 7%
n = 5 years
S= ?
S = 1000

S = 1000S
5

S = 1000
(5.750739)

0.07

S = P 5,750.74

(1+0.07) 5 - 1
.01

S = 1000 (5.750739)

S = P 5,750.74

EXAMPLES
Example 3:
Mr. Ong purchased a house. If he paid
P200,000 as down payment and
promised to pay P2,500 every 3 months
for the next 10 years and the rate of
interest is charged at 15% compounded
quarterly, what is the cash value of the
house?

EXAMPLES
Given:
Down payment = P 200,000
R = P2,500
i = 15%

-------------------comp. qtrly --- (15%/4)=

n = 10 years

---comp. qtrly----(10*4)=

40 periods

Cash value= down payment + A


A = 2,500A
40 0.037

A = 2,500
(20.5509899)

A = P 51,377.47

3.75%

A = 2500

1 - (1+0.01) -27
.01

A = 2,500 (20.5509899)

A = P 51,377.47

Cash value = P 200,000 +


51,377.47= P 251, 377.47

PERIODIC PAYMENT OF
ORDINARY ANNUITY
Periodic Payment of Ordinary Annuity
- series of equal payment occurring
at the end of each period.

PERIODIC PAYMENT OF
ORDINARY ANNUITY
S

R=
S

R=

n i

(1+i)n - 1
i

R=
A

n i

R=

A
1 - (1+i)-n
i

THE ANNUITY PAYMENT


FORMULA CAN BE USED FOR:

Amortized loans
Income annuities
Structured settlements
Monthly house rent payments
Monthly installments
Annual premiums of life insurance policy
Monthly retirement benefits (pension
plan)

EXAMPLES
Example 1:

If money is worth 8% compounded


quarterly, how much must be
deposited every 3 months in a fund in
order to have P150,000 at the end of
15 years?

EXAMPLES
Given:
S = 150,000
i = 8% -------------------comp. qtrly --- (8%/4)= 2%
n = 15 years

R=

150,000
S

R=

---comp. qtrly----(15*4)=

60 periods

R=

150,000
(1+0.02)60 - 1
0.02

60 0.02

150,000
114.0515394

R= P 1,315.19

R=

150,000
114.0515394

R= P 1,315.19

EXAMPLES
Example 2:

If an investment has a present value of


P183,000, what is the periodic
payment required if the interest rate
is 4% within 6 years and 9 months?

EXAMPLES
Given:
A = 183,500
i = 4%
n = 6.75 years
R=

183,500
1 - (1+0.04)-6.75
0.04

R=

183,500
5.814860191

R= P 31,557.08

EXAMPLES
On June 1, 2013, Grandma deposits P1,733
into an account to help pay for Emily's
summer volleyball camp for four
consecutive years. The first camp is
scheduled for June 2014. The account earns
6% interest per year, compounded annually.
The interest earned on the account balance
is deposited into the account on May 31 of
each year. If Grandma wants the balance to
be P0 at the end of the four years, how
much should she withdraw for Emily each
June?

EXAMPLES
Given:
A = 1,733
i = 6%
n = 4 years
1,733

R=

1 - (1+0.06)-4
0.06
R=

1,733
3.46510513

R= P 500.13

FINDING INTEREST RATE


If the interest rate is to be
determined, we use linear
interpolation and by formula.

LINEAR INTERPOLATION
- Itis a method of curve fitting
using linear polynomials.
- It calculates the unknown rate as
if it lies on a straight line between the
two rates.
- It is the simplest way to calculate
the unknown rate.

EXAMPLES
GIVEN:
R = P 800
S = P 37,500
m = 4 (qtrly)
n = 7 years ----------comp. qtrly --- (7.25*4)= 29 periods

S = RS

n i

37,500 = 800S
29 i
S

29 i

= 37,500
800
= 46.875

EXAMPLES

1/2 %

3%
=
45.2188
x
=
46. 8750
3 % = 48. 9108

%
d =

1.6562
3.9620
1.6562

3.9620
d
x

=
=
=
=

.2441 %
small i + d
3.0 + .2441 %
3. 2441 %

1.6562

i = x*m
= 3.2441 % x 4
= 12.98 %

3.6920

EXAMPLES
An item can be bought for P 50,000 or
for P 5,000 down payment and P 1,950 a
month for 24 months. Find the rate
compounded monthly.
Given :
Cash price = P 50, 500
n = 24 mos.
m = 12 (compounded monthly)
Dp = P 5,000
R = P 1,950

EXAMPLES
Solution
A = P 50,500 P 5,000
= P 45,000
A = RA

n i

45,000 = 1,950
A

24 i

24 i

= 45,000
1,950
= 23.0769

EXAMPLES

1/24 %

1/24
%

.0698
.1184

d =
d
x

7/24%
=
23.1467
x
=
23.0769
1/3%
= 23.0283

=
=
=
=

1.6562

x
3.9620 1/24%
.0246 %
small i + d
.2917 + .0246%
0.3163%

.0698

.1184

i = x*m
= 0.3163 % x 12
= 3.8%

FINDING THE TERM OF


ANNUITY

Table
of
Annuit
y

Formul
a
METHOD
S

TABLE OF ANNUITY
Future Value

Present Value

Amount of
annuity

Present value of
annuity

Periodic
payment

Term or period

Interest rate

FORMULA
FUTURE VALUE

PRESENT
VALUE

Ordinary Annuity

Annuity Due

EXAMPLES
How many payments would be needed if
they offered P19,660 at an effective rate
of 1% per month? The periodic payment
is P1,000.

A = Ra
a

n i

=A
n i
R

0.0
1

=
19,660
1,000

0.0
1

= 19.66
Locate at the
table

EXAMPLES
19,660
0.01)
1,000

- ln (1
n=ln (1 +
0.01)
ln
(1
0.803 )
n=
4
- ln (1.01)
n=

0.218
9
0.00995

n = 21.999 or 22
periods

EXAMPLES
How long does he need to accumulate a sum of
P10,000, if a man deposits P500 at the end of
each quarter in a fund which earns 4%
compounded quarterly.

S = Rs
s

n i

=S
n i
R

0.04

0.04

10,000
500
= 20

Locate at the table of FVOA

CONCLUDING PAYMENT = ORIGINAL


AMOUNT FULL PAYMENT

S=
500

18 0.01

S18

= 500 (19.6147)

S18

= 9807.3738

= 9807.3738 (1.01)
= 9905.4475
Concluding Payment
= 10000-9905.4475
= 94.55

EXAMPLES
1000 0.01
500

ln (1
n= +
)
ln (1 +
0.01)
ln
n=
(1.2)
ln
(1.01)
0.18232
n=
0.00995

n = 18.323 periods

EXAMPLES
S

P10,289.28

10 % annually or 5%
semiannually

P500 semiannually

S = Rs
s

n i

=S
n i
R

10,289.2
n 0.05
8
500

=
20.579
Locate at the
table of FVAD
n

0.05

EXAMPLES
n=

n=

ln (

10,289.28 x
0.05
500 ( 1+0.05)

ln (1 +
0.05)
ln (1.9799)
ln (1.05)

n=

0.6830
0.04879

n = 14 periods

+ 1)

EXAMPLES

A = Ra
a

n i

P3,127.418

6 % annually

P600
a

n i

=A
R

3,127.41
8
600

0.06

0.06

=
5.2124

Locate at the table of PVAD

EXAMPLES
- ln [ 1+0.06
n=
( 1 - ln (1 +
n=

-ln (0.747)
ln (1.06)

n=

0.2913
0.0583

n = 4.999 + 1
n = 5.999 or 6

3127.418
)]+
60
0
0.06)

+1
+1

AMOUNT AND PRESENT


VALUE OF ANNUITY DUE
The Present value of an annuity due (A) is
the sum of the present values of the payments
at the date of the first payment.
Present Value of the annuity due is its first
payment at the beginning of the term plus the
present value of the ordinary annuity of n-1
payments.
The AMOUNT (S) of an annuity due is the
sum of all accumulated amounts of the
payments at the end of the term.

AMOUNT AND PRESENT


VALUE OF ANNUITY DUE
Clues to help identify annuities due:

Payments at the beginning of


each
Payments in advance
First payment made today
Payments starting now

AMOUNT AND PRESENT


VALUE OF ANNUITY DUE
Present Value formula:
A = R + Ra

n-1

1 - (1+i) -n
A=R
(1+i)
i

EXAMPLES
A lottery offers the winner a choice
between a P300,000 cash prize, or
quarterly payments of P7,000 beginning
immediately and continuing for 20 years.
Which alternative should the winner pick
if money is worth 8% compounded
quarterly?

EXAMPLES
Solution:
A = 7,000 +
7,000

80-1 0.02

A = 7,000

1-80 (1.02)
(1+0.02)
0.02

A = 7,000 + 7,000
(39.53940386)

A = 7,000 (40.53940386)

A = 283,775.83

A = 283,775.83

EXAMPLES
The monthly rental of an apartment in
Malate is P9,000 payable at the
beginning of each month. If money is
worth 12% compounded monthly, what
is the cash equivalent of one(1) years
rent?

EXAMPLES
Solution:
A = 9,000 +
9,000

12-1 0.01

A = 9,000

1 - (1+0.01)(1.01)
12
0.01

A = 9,000 + 9,000
(10.3676282)

A = 9,000 (11.3676282)

A = 102,308.65

A = 102,308.65

AMOUNT AND PRESENT


VALUE OF ANNUITY DUE
Future Value formula:
The Future Value of annuity due formula is
used to calculate the ending value of a series
of payments or cash flows where the first
payment is received immediately.

S=R

n+
1

i 1

(1+i)n - 1
S=R
(1+i)
i

EXAMPLES
How much will Elyse accumulate in her
RRSP by age 60 if she makes semiannual contributions of P1,000 starting
on her 30th birthday? Assume that the
RRSP earns 8% compounded semiannually and that no contribution is
made on her 60th birthday.

EXAMPLES
Solution:
S=R

S=R

n+1

60+1 0.04

S=R

(1+i)n - 1

(1+i)

S = 1,000
(247.5103126)
S = 247,510.31

60
S = 1,000 (1+0.04) - 1(1.04)
0.04

S = 1,000 (247.5103126)
S = 247,510.31

EXAMPLES
Suppose that an individual would like to
calculate their future balance after 5
years with today being the first deposit.
The amount deposited per year is P1,000
and the account has an effective rate of
3% per year. It is important to note that
the last cash flow is received one year
prior to the end of the 5th year.

EXAMPLES
Solution:
(1+i)n - 1
S=R

S=R

n+1

S=R

5+1 0.03

S = 1,000

(1+i)

(1+0.03)5 - 1
0.03

(1.03)

S = 1,000 (5.46840988)

S = 1,000 (5.46840988 )

S = 5,468.41

S = 5,468.41

PERIODIC PAYMENT OF
ANNUITY DUE
Periodic
Payment
when A is
known

Periodic
Payment when S
is known

EXAMPLES
A company wishes to deposit an amount of
money into an account at the beginning of
each year for the next 5 years to purchase
a new machine costing $50 000. How
much will each yearly payment be if the
current interest rate is 7.2%?

EXAMPLES
SOLUTION:

R = ??

FVAD= $ 50,000
R = ??

R = ??
2

R = ??
3

N = 5 years r = 7.2% per


year

R = ??
4

EXAMPLES
R=

R=

50,000
(1+0.072) 5 (1+0.072)
1 0.072

50,000
0.415708784
(1.072)
2 0.072

50,000
6.18944189
8
R = 8,078.27
R=

EXAMPLES
An individual who would like to calculate
the amount they can withdraw once per
year in order to allow their savings to last
5 years. Suppose their current balance,
which would be the present value, is
$5,000 and the effective rate on the
savings account is 3%.

EXAMPLES
SOLUTION:
PVAD= $
5,000
R = ??
0

R = ??
1

R = ??
2

N = 5 years

R = ??
3

r = 3% per year

R = ??
4

EXAMPLES
R=

A
1 - (1+i)(n-1)
i

R=

+1

5,000
1 - (1+0.03)(5-1)
0.03

R=

+1

5,000
4.717098403

R = 1,059.97

PRESENT VALUE OF A
DEFERRED ANNUITY
Deferred annuities are annuities that do
not make payments until later.
The present value of a deferred annuity is
the value at the beginning of the period
of deferment, not at the beginning of
the term of the ordinary annuity.

PRESENT VALUE OF A
DEFERRED ANNUITY

A=R

A=

d+
n

d i

1-(1+i) (n+d)
i

1-(1+i) (n+d)
i

AMOUNT OF A DEFERRED
ANNUITY
S = RS

S=R

n i

(1+i) n - 1
i

EXAMPLES
Find the present value of deferred annuity
of P15,000 a year for 10 years deferred for
5 years. Money is worth 7.5% effective.

Given:
R = 15,000
I = 7.5%
d = 5 years
n = 10 years

EXAMPLES
A=
15,000
A=
15,000

5+1
0

7.5

7.5

1-(1+0.075)
(10+5)

0.075

1-(1+0.075) -5)

0.075

A = 15,000 (8.827120 - 4.045885)


A = 132,406.80 60,688.28
A = 71,718.52

EXAMPLES
If money is worth 16% compounded
semiannually, find the present value of a
sequence of 12 semiannual payments of
P3,000 each, the first of which is due at
the end of 3 and years.
Given:
R = 3,000
i = 16% -------------------comp. semiannually--- (16%/2)= 8%
n = 12 periods
d = 3 -------------------comp. semiannually--- (3 *2) = 6 periods

EXAMPLES
A = 3,000

A = 3,000

12+
6

1-(1+0.08) (18)

0.08

1-(1+0.08) -6

A = 3,000 (9.37189 4.62288)


A = 28,115.67 13, 868.64
A = 14,247.03

0.08

PERIODIC PAYMENT
DEFERRED ANNUITIES
Periodic Payment Deferred Annuities:
An annuity contract can allow an
investor to make periodic payments on a
scheduled basis, either monthly, quarterly
or annually. The annuity pays out its
benefits at a later date and is referred to
as a periodic-payment deferred annuity.

PERIODIC PAYMENT (R) OF


DEFERRED ANNUITY
To obtain the PERIODIC PAYMENT (R) use
the formula:

R=
a

n+d i

- d i

R=
1-(1+i)
(n+d)

1-(1+i) d
i

EXAMPLES
What equal payment at the end of each
month for 4 years will pay off a debt of
180,000, the first payment is due in 1 year
and 4 months? Money is worth 24%
compounded monthly.

EXAMPLES
Given:
A = 180,000
j= 24%
m= 12

n= 4(12)= 48 (no. of payment to be


made)
d= (1 4/12)(12)-1
= (1 1/3)(12)-1=15 (no. of fictitious
payments)

EXAMPLES
180,000

R=

48+15 0.02-

9 0.02

180,000

R=
a

63 0.02-

9 0.02

180,000
R=
35.639843 12.849264
R=

180,000
22.790579

R = 7,898

EXAMPLES
180,000

R=

1-(1+0.02) 1-(1+0.02) 15
(48+15)
0.02
0.02
R=

180,000

R=

35.639843
12.849264
180,000
22.790579

R = 7,898

EXAMPLES
An heir inherits 200,00. Instead of taking
the cash, she invests the money at 6%
converted semi-annually, with the
understanding that she will receive 20
equal semi-annual payments with the first
payments to be made at the end of 5
years. Find the size of the payments.

EXAMPLES
d= 9 (fictitious payments)
n= 20 (no. of actual payments to be
made)
A= 200,000
j = 6%
m= 2

EXAMPLES
R=

200,000
a

20+
0.039

R=

R=

9 0.03

200,000

29 0.03-

9 0.03

200,000

19.188455 7.786109

R=

200,000
11.402346

R = 17,540.25

EXAMPLES
R=

200,000
1-(1+0.03) 1-(1+0.03) 9
(20+9)
0.03
0.03

R=

200,000
19.188455 7.786109

R=

200,000
11.402346

R = 17,540.25

SUMMARY OF FORMULAS
ORDINARY ANNUITY:
Amount:

S = RS

S=R

Present Value:

A = Ra

n i

(1+i) n - 1
i

A=R

n i

1 - (1+i) -n
i

SUMMARY OF FORMULAS
PERIODIC PAYMENT OF ORDINARY ANNUITY:
Amount:

Present Value:
S

R=
S

R=
a

n i
S

R=

n i
A

R=

(1+i)n - 1

1 - (1+i)-n

SUMMARY OF FORMULAS
FINDING THE INTEREST RATE OF ANNUITY:
Through linear interpolation

SUMMARY OF FORMULAS
FINDING THE TERM OF AN ANNUITY
Amount - Ordinary
S

i)

ln (1 R
n= +
ln (1 + i)
Amount Annuity
Due
Sx

n=

ln ( R i(1 + + 1)
i)

ln (1 + i)

Present Value Ordinary

n=

- ln (1

A
-R

i)

ln (1 + i)
Present Value Annuity
Due
A

- ln [ 1+i ( 1 R )]
n =+1
ln (1 + i)

SUMMARY OF FORMULAS
ANNUITY DUE
Present Value:

Amount:

S=R

n+
1

i -1

A = R + Ra

n-1

-n
1
(1+i)
(1+i)n - 1
A
=
R
(1+i)
S=R
(1+i)
i
i

SUMMARY OF FORMULAS
PERIODIC PAYMENT OF ANNUITY DUE:
Amount:

Present Value:
S

R=
S

R=

n i (1+i

)
R=

S
(1+i) n (1+i)
1
i

R=

A
a

n1

i+ 1

A
1 - (1+i)(n-1)
i

+1

SUMMARY OF FORMULAS
DEFERRED ANNUITY:
Amount:

S = RS

S=R

n i

(1+i) n - 1
i

SUMMARY OF FORMULAS
DEFERRED ANNUITY:
Present Value:

A=R

A=

n+d

1-(1+i)
(n+d)

d i

1-(1+i) d
i

SUMMARY OF FORMULAS
PERIODIC PAYMENT OF DEFERRED ANNUITY:
Amount:

R=
S

n i
S

R=

(1+i)n - 1
i

SUMMARY OF FORMULAS
PERIODIC PAYMENT OF DEFERRED ANNUITY:
Present Value:

R=

A
a

n+d i

- d i

R=
1-(1+i)
(n+d)

1-(1+i) d
i