ANNUITIES

Definition of Terms

Annuity - A sequence of payments made at equal

(fixed) intervals or periods of time.

Payment Interval - The time between successive

payments.
Annuities may be classified in different ways:
 According to payment interval and interest
period.
Simple Annuity - An annuity where the payment interval is
the same as the interest period.

General Annuity - An annuity where the payment interval

is not the same as the interest period.
 According to time of payment:
Ordinary Annuity - A type of annuity in which the
or (Annuity payments are made at the end of each
Immediate) payment interval.

Annuity Due - A type of annuity in which the

payments are made at beginning of each
payment interval
 According to duration:

Annuity Certain - An annuity in which payments begin

and end at definite times.

Contingent Annuity - An annuity in which the payments

extend over an indefinite (or
indeterminate) length of time.
 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 -sum of future values of all the

an annuity, (F) 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
Example of annuity:

Installment basis of paying a car,

appliance, house and lot, tuition fee,
etc.
Examples of contingent annuity:

Life insurance, pension payments

Simple Annuity

P F
___R___R___R___R___R . . . ____R_
0 1 2 3 4 5... n
 Example: An installment payment of an
appliance of P3000 every month for 6 months.
P F
__3000__3000__3000__3000__3000__3000
0 1 2 3 4 5 6
6 months

Periodic Payment, R = 3,000

Term, t = 6 months
Payment interval = 1 month
Amount (Future Value) of an Ordinary
Annuity(Annuity Immediate)
(1+𝑗)𝑛 −1
𝐹= 𝑅
𝑗

Where: R is the regular payment,

j is the interest rate per period, and
n is the number of payments
Example 1.

Suppose Mrs. Santos would like to save P3000 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 six
months?
Example 2.

In order to save for her high school

graduation, Jessa decided to save P 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 six years?
Present Value of an Ordinary Annuity
(Annuity-Immediate)
−𝑛
1 − (1 + 𝑗)
𝑃=𝑅
𝑗
Where: R is the regular payment
j is the interest rate per period,
n is the number of payments
Example 3.
Mrs. Santos would like to know the present value
of her monthly deposit of P3,000 when interest
is 9% compounded monthly. How much is the
present value of her savings at the end of 6
months?
Cash Value or Cash Price of a purchase

It is equal to the down payment (if

there is any) plus the present value
of the installment payments.
Example 4.
Mr. Reyes paid P200,000 as down payment for a car.
The remaining amount is to be settled by paying
P16,200 at the end of each month for 5 years. If
interest is 10.5% compounded monthly, what is the
cash price of his car?
Periodic Payment R of an Annuity:
(1+𝑗)𝑛 −1 𝐹
1. 𝐹 = 𝑅( ) 𝑅=
𝑗 (1 + 𝑗)𝑛 −1
𝑗

1 −(1+𝑗)−𝑛 𝑃
2. 𝑃 = 𝑅( ) 𝑅=
𝑗 1 − (1 + 𝑗)−𝑛
𝑗
Where: R is the regular payment;
P is the present value of an
annuity;
F is the future value of an
annuity;
j is the interest rate per period;
n is the number of payments
Example 5.
Jayson borrowed P100,000. he agrees
to pay the principal plus interest by
paying an equal amount of money each
year for 3 years. What should be his
annual payment if interest is 8%
compounded annually?