Annuity Due

An annuity due is an annuity whose payment happens immediately or at the

beginning of each payment period. For instance, your monthly payment of your house
rental is an example of annuity. If you pay at the end of every month, that is ordinary
annuity. But if your landlady requires you to pay at the beginning of each month, then that
is an example annuity due.

Working Formula

Let A be the annuity’s present value and S its value at the end of the term. Then

p(1  i)[1  (1  i)  n ] Ai
A and thus, p 
i (1  i )[1  (1  i )  n ]

p(1  i)[(1  i) n 1] Si

S and thus, p 
i (1  i )[(1  i ) n 1]

Examples

Problem 1: Find the present value of an annuity of Php100 payable at the beginning of
each 3 months for 2 years if interest is pegged at 8% compounded quarterly?

Solution: The present value of the annuity due is the sum of the first payment and the
present value of the ordinary annuity consisting of 7 (or n-1) future payments. Thus

100(1.02)[1  (1.02) 8 ]
A = Php747.20
0.02

Problem 2: What amount can be generated at the end of the term in an investment that
requires payment of Php2000 at the beginning of each 3 months for 2.5 years if interest
is 10% compounded quarterly?

Solution: The value of S is the accumulated value of an ordinary annuity consisting of n

+ 1 payment periods minus the value of the last payment which have not been made.
Thus

2000 (1.025)[(1.025)10 1]

S = Php22, 966.93
0.025

Problem 3: What amount payable at the beginning of each 2 months for 3 years is
sufficient to pay a debt of Php50, 000 if money is worth 12% compounded bimonthly?

Solution: Since the amount of Php50, 000 is a value determined at the beginning of the
term, then the formula to be used to determine the periodic payment is the one that
involves the annuity’s present value. Thus,

50,000 (0.02)
p = Php3, 269.71
(1.02)[1  (1.02) 18 ]
Exercises
1. A government teacher who decided to avail of the early retirement program of the
GSIS upon reaching 50 years of age was informed by the agency to receive a
pension of Php5, 500 at the beginning of each month for 30 years assuming that
he will live up to 80 years of age to receive his pension. However, the man opted
to get all the worth of his pension in a single payment upon reaching 50. How much
money will he receive in cash if money is worth 6% compounded monthly?

2. A graduating student who availed of a loan about 4 years ago, with interest at 3%
compounded bimonthly, is now making his final payment of Php400. If he has been
paying at the beginning of every 2 months for 4 years, how much was his original
loan? If the student was allowed to make a single payment of his loan at the
beginning of the last payment interval, how much will he pay?

3. How much money to be paid at the beginning of each 3 months for 3 years
will be sufficient to discharge a debt of Php100, 000 if interest is pegged at 12%
compounded quarterly?

4. Four IT new graduates were planning to build a capital of Php500, 000 at the end
of 2 years. To realize the plan, each one of them agreed to deposit equal sum of
money at the beginning of each month for 2 years. How much individual monthly
deposit will be sufficient to accumulate the amount if the deposits will earn interest
at 3% compounded monthly?

5. Two teachers (A and B) purchased two types of insurance from a company called
Amphil. Teacher A’s insurance requires quarterly payment of Php2,500 for 10
years, while that of teacher B requires semiannual payment of Php6,000 also for
10 years. The interest rate applied on both insurances is 12% but compounded
quarterly for A and semiannually for B. Both teachers have been paying the above
amounts for exactly 9 years now when the company told them to stop paying and
to withdraw their money because the company is on the verge of bankruptcy. If the
company agrees to refund the actual money contributed by both teachers, how
much does each teacher lost from the investment?

Deferred Annuity

A deferred annuity is an annuity whose term begins after the lapse of a specified
time. The present value of this type of annuity is the sum of the present values of all future
payments computed from present time onward minus the present value of the supposed
payments for the duration of the period of deferment.

Working Formula

Let d be the number of payment interval deferred and n the number of interval where
actual payments occurred. Then
p(1  i)  d [1  (1  i)  n ]
A
i
Ai A(1  i ) d  n
and thus, p or p  i
(1  i ) d [1  (1  i )  n ] (1  i ) n 1
Examples

Problem1: Five years ago, a student loaned an amount that he used to finance his
Engineering studies. Today, he is being asked to start to payback by paying Php500 at
the end of each month for 6 years, starting on the first month of the 6th year onward. If the
payments include interest of 3% compounded monthly, how much money was borrowed?

Solution: The amount borrowed 5 years ago is the sum of the present values, at that
time, of the monthly payment of Ph500 for the span of 11 years (or 132 payments) from
the date the loan was granted up to the time it will be fully paid minus the sum of the
present values of the supposed payments for the duration of the deferment period which
is 5 years (or 60 payment intervals). Thus

500(1.0025) 60 [1  (1.0025) 72 ]

A = Php28, 329.85
0.0025

Problem 2: A student who has approved “Income Generating Project” proposal by a

financial institution was granted a loan of Php20, 000 payable in 11 equal quarterly
payments, and bearing interest at 1% compounded quarterly. If he is given a privilege of
making the first payment at the end of the second quarter of the second year, how much
is his quarterly payment?

Solution: The period of deferment consisted of 5 payment intervals the last of which is
the first quarter of the second year. The actual quarterly payments start at the end of the
second quarter of the second year and continued onward for a sequence of 12 payments.
Thus, using either formula above,

20,000 (1.0025 ) 512 (0.0025 )

p = Php1, 715.15 or
(1.0025 )12 1

20,000(0.0025)
p = Php1, 715.53
(1.0025) 5 [1  (1.0025) 12 ]

Exercises
1. A retiring teacher is offered two modes of getting his pension. The first mode is to
get a lump sum of Php500, 000 while the second is to get a cash of Php100, 000
and to receive Php5, 500 monthly within the next 20 years the first of which is to
be released at the end of the first month of the third year. If money is worth 3%
compounded monthly, which mode is favorable to the pensioner?

2. Find the periodic payment that would be sufficient to pay a debt of Php50, 000 with
interest at 4% compounded quarterly and payable in 10 equal quarterly payments
if the first payment is due at the end of a) first quarter of the third year, and b) first
quarter of the fourth year?

3. A debt of Php100, 000 with interest at 8% compounded quarterly is to be paid

successively at the end of each three months within 5 years from now. Find the
periodic payment if the first is due at the end of a) first quarter of the second year
and b) second quarter of the third year?
 4. A student borrowed money with interest at 2% compounded quarterly and agreed
to discharge his debt by paying at the end of each month Php200 for the first year,
Php150 for the second year and Php100 for the third year. How much is the
amount borrowed?
5. In paying a debt of Php20,000 plus interest at 8% compounded semiannually at
the end of each 6 months for 4 years starting after 2 years from the time money
was borrowed. After 1 year of paying, the student decided to pay every end of each
month a corresponding amount for the remaining life term of the annuity. How
much will he pay monthly?

Value of Annuity on Arbitrary Date Beyond the Term for Payments at the Beginning
and at the End of an Interval

The value of the annuity on a date beyond its term for payments occurring at the
ends of the intervals is the accumulated value of an ordinary annuity with term that ends
on that date minus the accumulated value of the annuity that has no actual payments.
The value of the annuity on a date beyond its term for payments occurring at the
beginnings of the intervals is the accumulated value of the annuity due at the end of the
term by k intervals beyond the term.

Working Formula
Let k be the arbitrary number of intervals falling beyond the term, and n the total
number of intervals in the term. Then

Case 1: Value of the annuity on arbitrary date, k, beyond the term for payments
occurring at the ends of the intervals.
p(1  i) k [(1  i) n 1] Si
S and p
i (1  i ) [(1  i ) n 1]
k

Case 2: Value of the annuity on arbitrary date, k, beyond the term for payments
occurring at the beginnings of the intervals.
p(1  i) k 1 [(1  i) n 1] Si
S and p k 1
i (1  i ) [(1  i ) n 1]

Examples

Problem 1: A student decided to build a capital that will enable him to start a business
after he will graduate 4 years from today by depositing in a bank Php400 every end of
each month for 4 years. If interest is set at 24% compounded monthly, how much is the
accumulated value of his money at the end of 5 years?

Solution

The accumulated value of the money at the end of 5 years is the value of the
ordinary annuity with 60 payment intervals minus the value of the annuity with 12 payment
intervals. The subtraction of the value of the annuity with 12 payments is justified by the
fact that there were no actual payments made on these intervals.

400(1.02)12 [(1.02) 48 1]

S = Php40, 255.78
0.02
Problem 2: If deposit is made at the beginning of each payment interval in problem 1,
what is the value of the money at the end of 5 years?

Solution

The accumulated value of the money at the end of 5 years is the value that will
result when the amount of the annuity due at the end of 4 years is accumulated by one
more year (or 12 intervals). This situation is accounted in the formula below:

400(1.02)13 [(1.02) 48 1]

S = Php41, 060.90
0.02

Problem 3: In building a capital of Php80, 000 at the end of 6 years, a graduating student
deposited Php10, 000 4 years ago and will be depositing equal amount of money at the
end of every 2 months for the fifth year. How much is the periodic payment if interest is
set at 10% compounded bimonthly?

Solution

The amount of periodic payment can be determined from the equation of values
that may be formed at the end of the fifth year which is the end of the term of the annuity.
The values to be equated are the discounted value of the amount at the end of 6 years
by k intervals and the sum of the accumulated value of the annuity with n payment
intervals and accumulated amount of the cash paid with m-k intervals before the start of
the term of the annuity. This situation is encapsulated in the formula below:

S  C (i  1) m
p i
(1  i ) k [(1  i ) n 1]
Where: S – amount at the end of the final period (time at D)
C – cash paid at the beginning of investment (time at A)
m – total number of intervals within the whole duration of
investment (between A and D)
k – number of intervals beyond the end of the term of the annuity
(between C and D)
n – total number of payment intervals of the annuity (between B
and C)

A B C D

Thus,

80,000  10,000 (1.05) 36

p 0.05 = Php1, 800.24
(1.05) 6 [(1.05) 24 1]

Exercises
1. A student who availed of the government’s “study now pay later” program has been
receiving allowance of Php2, 500 every end of each month for 4 years ending
today on agreement that he will payback by a single installment at the end of 3
years from today. If money is worth 3% compounded monthly, how much must he
pay?
2. A student who has planned to generate fund has been depositing to his account in
a credit cooperative store Php250 at the beginning of each 2 months for 3 years.
If interest is set at 6% compounded bimonthly, how much money will have been
generated at the end of 5 years?

3. A student wishes to accumulate fund of Php10, 000 at the end of 4 years by

depositing equal amount of money to his account in a bank that charges interest
of 12% compounded monthly. How much money must he deposit a) at the
beginning of each month for 2 years or b) at the end of each month for 2.5 years
that will be sufficient to generate the fund?

4. After paying Php1,500 down payment for a burger machine that will be worth
Php15,000 three years from today, a man failed to make his monthly payment for
the first year. The man is asked to discharge his debt by making equal monthly
payments in the second year. What amount is sufficient to generate the fund if
money is worth 6% compounded monthly?