ANNUITY

KOLEJ PERDANA
BUSINESS MATHEMATICS
26 JUNE 2019
nanteniganesan@gmail.com
 INTRODUCTION
 Annuity is a series of (usually) equal payments
made at (usually) equal intervals of time.

 Examples of annuity:
 Shop rentals
 Insurance policy premium
 Regular deposits to saving accounts
 Installment payment
 Annuity - Classes
 Annuity can be classified into many classes:
 Annuity certain – payment are made at the end of each
payment period.
 Annuity due – payment are made at the beginning of each
period
 General annuity
 Perpetuity & others

 In this chapter we shall mainly discuss ordinary annuity

certain where payment are made at the end of each
payment periods & the interest and payment periods are
of the same interval.
Future & Present values
ordinary annuity certain
 Example 1: RM 100 is deposited every month for 2 years 7 months at 12%
compounded monthly. What is the futures value of this annuity at the end of
the investment?
 Example 2: RM 100 is deposited every 3 months for 2 years 9 monts at 8%
compounded quarterly. What is the futures value of this annuity at the end of the
investment period? How much is the interest earned?
 Example 3: RM 100 is invested every month in an account that pays 12%
compounded monthly for two years. After the two years, no more deposits
are made. Find the amount of the account at the end of the five years and
the interest earned.
Continue
 Try yourself
1. Find the future value and the interest earned for each
of the following annuities:
a) RM 6,000 every year for 8 years at 12% compounded
annually.
b) RM 800 every month for 2 years 5 months at 5%
compounded monthly.
c) RM 950 every 3 months for 3 years 9 months at 6%
compounded quarterly.
d) RM 2,450 every 2 months for 1 year 8 months at 6%
compounded every two months.
e) RM90 every day for 150 days at 10% compounded
daily
 PRESENT VALUE
 The present value (discounted value) of an ordinary
annuity certain is the sum of all present values of the
periodic payments.
Example 1: Raymond has to pay RM300 every month for 24 months to settle a loan at
12% compounded monthly

a) what is the original value of the loan?

b) what is the total interest that he has to pay?
Example 2: John won an annuity that pay RM1,000 every three months for three years.
What is the present value of this annuity if the money is worth 16% compounded
quarterly?
Example 3: James intends to give a scholarship worth RM5,000 every year for six years
How much must he deposit now into an account that pays 7% per annum to provide
the scholarship?
 Example 4: Shirley wants to provide a scholarship of RM3,000 each year for the next
three years. The scholarship will be awarded at the end of each year to the best student.
If the money is worth 10% compounded annually, find the amount that must be
invested now.
 Try yourself
1. Find the present values of the following annuities
a) RM 6,000 every year for eight years at 12%
compounded annually.
b) RM800 every month for two years five months at 5%
compounded monthly
c) RM950 every three months for three years nine months
compounded quarterly
d) RM2,450 every two months for one year eight months
at 6% compounded every two months.
e) RM90 every day for 150 days at 10% compounded
daily.
 Amortization
 An interest bearing debt is said to be amortized when
all the principal and interest are discharged by a
sequence of equal payments at equal intervals of time.
We have actually discussed the principal earlier
without mentioning it.

 Amortization schedule – an amortization schedule is a

table showing the distribution of principal and interest
payments for the various periodic payments.
Example 1:
Continue..
 Sinking Fund
 When a loan is settled by the sinking fund method, the
creditor will only receive the periodic interests due.

 The face value of the loan will only be settled at the

end of the term. In order to pay this face value, the
debtor will create a separate fund in which he will
make periodic deposits over the term of the loan.

 The series of deposits made will amount to the

original loan.
Example 1:
Continue...
 Self-practice
1. Find the future value and the interest earned for each of the following annuities:
a) RM 3,000 every year for 9 years at 10% compounded annually.
b) RM 730 every month for 4 years 5 months at 4% compounded monthly.
c) RM 1000 every 2 months for 3 years 9 months at 5% compounded quarterly.
d) RM 1,450 every 3 months for 1 year 8 months at 8% compounded every two
months.
e) RM50 every day for 160 days at 12% compounded daily

2. Find the present values of the following annuities

a) RM 7,000 every year for ten years at 10% compounded annually.
b) RM600 every month for three years four months at 7% compounded monthly
c) RM550 every three months for four years ten months compounded quarterly
d) RM1,250 every two months for two year eight months at 5% compounded
every two months.
e) RM100 every day for 130 days at 9% compounded daily.