Annuity

Download as pptx, pdf, or txt
Download as pptx, pdf, or txt
You are on page 1of 47

INTRODUCTION TO ANNUITY

ANNUITY

It is a series of equal payments or


withdrawals in the same period of
time.
The following terms are used in annuity

Future value of annuity is the total amount of series


payments plus the interest.
Present value of annuity is the amount of money
needed to be invested in order to receive a series
of payments for a period of time.
Term of annuity is the time from the start of the first
payment period until the end of the last payment
period.
Payment is the amount of each payment that
you have in an annuity and n is the number of
payments in an annuity.
Payment interval is the time between
successive payments in an annuity.
Three types of Annuity

1. Ordinary Annuity – is when you make a payment


at the end of an interval.
2. Annuity Due – is when the payment is done at the
beginning of the payment interval.
3. Deferred Annuity – is an annuity that the payments
are not done at the beginning or at the end of the
period. Payments are done at some later date of a
period of time.
The ordinary annuity, annuity due and deferred
annuity can be simple annuity or general annuity
Simple Annuity – is an annuity where the
payment interval is the same with the
compounding intervals.
General annuity – is an annuity where the
payment interval is different from the
compounding interval.
Example Problem 1

Cecilia is going to pay a series of payments of


₱2,500 at the end of every six months for 5
years with an interest rate of 5.5%
compounded semiannually.
Example Problem 2

Mr. De Leon made a loan where he has to


make payments of ₱3,800 at the beginning of
every four months for 3 years with an annual
interest rate of 3.4% compounded
semiannually.
Example Problem 3

Jay just bought the car of his father which he


will pay ₱10,000 per quarter for 10 years after
being deferred for 5 years with the interest
rate of 6 % compounded quarterly.
Other Terms

Cash Flows – the payment that you do in any


investments or savings.
Categories of Cash Flows
1. Inflows – are payments that you received.
2. Outflows – are payments that you made.
Ordinary Annuity
Formula for savings of Ordinary Annuity

Where
PMT - is the payment
i - is the periodic interest by getting the quotient
of interest rate r and the compounded period n
t - is the number of years of investment.
Regular Payment or Periodic Payment (savings)

(𝐹𝑉 𝑎 )(𝑖)
𝑃𝑀𝑇 = 𝑛𝑡
( 1+𝑖 ) − 1
Present value of ordinary annuity (loan,
withdrawal)

Regular Payment or Periodic Payment (loan)

(𝑃 𝑉 𝑎 )(𝑖)
𝑃𝑀𝑇 = −𝑛𝑡
1− ( 1+𝑖 )
Example 1
As a senior high school student, Jose decided to start making
investments. He is going to deposit ₱600 at the end of each month
for one year to an investment account that gives 6% interest rate
compounded monthly. How much is the future value of annuity of
Jose at the end of one year?
FVa  ? FVa  PMT 
 1  i  - 1
nt


PMT  600 pesos  i 
rate  6%or 0.06  (1  0.005)121 - 1
FVa  600 
n  12  0.005 
time  1 year FVa  7,401,34 pesos
i  0.005
Fernan borrows money to buy a motorcycle. He will repay the loan
by making monthly payments of ₱1,500 every end of the month for
the next 24 months at an interest rate of 9% per year compounded
monthly. How much did Fernan borrow?
PVa  ?
PMT  1,500 pesos
rate  9%or 0.09
n  12
time  2 year
i  0.0075
𝑃 𝑉 𝑎 =32,833.72𝑝𝑒𝑠𝑜𝑠
Mrs. Dolly Bugtong plans to travel abroad with her family. What
amount should she save at the end of each month in a bank that
credits 1.44% compounded monthly for 3 years in order to
accumulate the ₱250,000 that she needs for her plan?

FVa  250,000 pesos ( 𝐹𝑉 𝑎 )(𝑖)


𝑃𝑀𝑇 = 𝑛𝑡
PMT  ? ( 1+𝑖 ) −1

rate  1.44%or 0.0144 ( 250,000)(0.0012)


𝑃𝑀𝑇 = 12( 3)
n  12 ( 1+ 0.0012 ) −1
time  3 year
i  0.0012 𝑃𝑀𝑇=6,799.69𝑝𝑒𝑠𝑜𝑠
Mr. Antonio Villanueva purchases a new computer that costs ₱40,000 cash. He
pays 8.75% as down payment and charged the balance through his credit card.
How much must he pay at the end of every month for 1 year if Alton Credit Card
and Company charges 3.6% compounded monthly without any other hidden
charges? ( 𝑃 𝑉 𝑎 )(𝑖 )
𝑃𝑀𝑇 =
DP  3,500 pesos 1 − ( 1 +𝑖 )
− 𝑛𝑡

PVa  36,500 pesos


(36,500)(0.003)
PMT  ? 𝑃𝑀𝑇 = −( 12) ( 1)
1− ( 1+0.003 )
rate  3.6%or 0.036
n  12
time  1 year 𝑃𝑀𝑇 =3,101.30
i  0.003
Annuity Due
Formula for the Future Value of Annuity Due
(savings)

Where
PMT - is the payment
i - is the periodic interest by getting the quotient
of interest rate r and the compounded period n
t - is the number of years of investment.
Regular or Periodic payment of annuity due
(savings)

(𝐹 𝑉 𝑎)(𝑖)
𝑃𝑀𝑇 =
[ ( 1+𝑖 ) 𝑛𝑡
−1 ] ( 1+𝑖 )
Present value of annuity due (loan)

[ ]
−𝑛𝑡
1− ( 1+𝑖 )
𝑃𝑉 𝑎=𝑃𝑀𝑇 ( 1+𝑖 )
𝑖
Regular or Periodic payment of annuity due (loan)

( 𝑃 𝑉 𝑎)(𝑖)
𝑃𝑀𝑇 =
[ 1− ( 1+𝑖) ] ( 1+𝑖)
− 𝑛𝑡
An investment of ₱1,500 is made at the beginning of each
year for 8 years. Find the total investment at the end of the
term if the money is worth 4.6% compounded annually.

FVa  ?
PMT   pesos
rate  4.6%or 0.046
n 1
time  8 years
i  0.046
A college student saves at the start of each month for 4 years in order to have
an initial capital of ₱50,000 for his business. If he decided to put his savings in
an investment company that pays 2.76% compounded monthly. What amount
should he have at beginning of each month for 4 years?
( 𝐹 𝑉 𝑎 ) (𝑖)
𝑃𝑀𝑇 =
FVa  50,000 pesos [ ( 1 +𝑖 ) 𝑛𝑡
− 1 ] ( 1 +𝑖 )

PMT  ? ¿
(50,000 )( 0.0023 )
rate  2.76%or 0.0276 [ ( 1 + 0.0023 )12( 4 ) − 1 ] ( 1+ 0.0023 )
n  12 1 15
¿
[ ( 1 .0023 )48 − 1 ] ( 1 .0023 )
time  4 years 1 15
¿
i  0.0023 [ 1.1166 − 1 ] ( 1 .0023 )
¿984.01𝑝𝑒𝑠𝑜𝑠
Determine the amount that Ms. Calayag will deposit every beginning
of the month in PBI Family Savings Bank that credits 2.34%
compounded monthly, for 5 years in order to have ₱500,000 and
start a business of her own.
(𝐹 𝑉 𝑎 ) (𝑖)
𝑃𝑀𝑇 =
FVa  500,000 pesos [ ( 1 +𝑖 )𝑛𝑡 − 1 ] ( 1 +𝑖 )
PMT  ? (500,000 )(0.002 )
¿
rate  2.34%or 0.0234 [ ( 1 + 0.002 )12(5 ) − 1 ] ( 1 +0.002 )
n  12 ¿
1 , 000

time  5 years [ ( 1 .002 )60 − 1 ] ( 1 .002 )


1 , 000
i  0.002 ¿
[ 1.1274 − 1 ] ( 1 .002 )
¿7,833.63 𝑝𝑒𝑠𝑜𝑠
A machine can be bought for ₱4,000 down payment and 8 equal
monthly payments of ₱1,200 payable every beginning of the month.
If the money is worth 6% compounded monthly, find the cash

[ ]
equivalent of the machine. −𝑛𝑡
PVa  ? 1 − ( 1+𝑖 )
𝑃𝑉 =𝑃𝑀𝑇
𝑎 ( 1+𝑖 )
CashEquivalent  ? 𝑖 −12(0.6667)
PMT  2 pesos ¿ 1,200 [
1 − ( 1+0.005 )
0.005 − 8.0004 ]( 1+0.005 )
dp  4,000 pesos
rate  6%or 0.06
¿ 1,200 [
1 − ( 1.005 )
0.005 ] (1 .005 )
n  12 ¿ 9,434.95 𝑝𝑒𝑠𝑜𝑠
time  8 / 12or 0.6667 years 𝐶 𝐴𝑠h 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 =𝐷𝑃 + 𝑃𝑉 𝑎
i  0.005
¿ 4,000+ 9,434.95
𝐶 𝐴𝑠h 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 =13,434.95
Cavite Bank offers to their depositors a housing loan at 2% compounded monthly.
A client avails of the housing loan and agrees to pay a monthly amortization of
₱7,500 payable every beginning of the month for 10 years. How much is the cash
equivalent of the house and lot if the down payment is ₱200,000?

[ ]
−𝑛𝑡
PVa  ? 1 − ( 1+𝑖 )
𝑃𝑉 𝑎=𝑃𝑀𝑇 ( 1+𝑖 )
CashEquivalent  ? 𝑖 −12 (10)
PMT  7,5 pesos ¿ 7,500 [
1 − ( 1+0.0017 )
0.0017 −120 ]
( 1+ 0.0017 )
dp  200,000 pesos
rate  2%or 0.02
¿ 7,500 [
1 − ( 1.0017 )
0.0017 ]
( 1 .0017 )
n  12 ¿ 814,896.39 𝑝𝑒𝑠𝑜𝑠
time  10 years 𝐶 𝐴𝑠h 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 =𝐷𝑃 + 𝑃𝑉 𝑎
i  0.0017
¿ 200,000 +814,896.39
𝐶 𝐴𝑠h 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡=1,014,896.39
Mr. Molina agrees to pay a monthly amortization every beginning of
the month for 25 years to pay the house and lot worth ₱400,000 that
he acquired from the PAGMAMAHAL Fund. If the private financing
institution charges 6% compounded monthly, find his monthly
payments? ( 𝑃 𝑉 𝑎 )( 𝑖)
𝑃𝑀𝑇 =
[ 1 − ( 1 + 𝑖 )− 𝑛 𝑡 ] ( 1 + 𝑖 )
PVa  400,000 pesos (400,000 )( 0.005 )
𝑃𝑀𝑇 =
[ 1 − ( 1 +0.005 )−12( 25) ] ( 1 + 0.005 )
PMT  ?
2,000
rate  6%or 0.06 𝑃𝑀𝑇 =
[ 1 − ( 1.005 ) − 300
] ( 1 .005 )
n  12
2,000
time  25 years 𝑃𝑀𝑇 =
(1 − 0.224 ) ( 1 .005 )
i  0.005
𝑃𝑀𝑇 =2,564.38 𝑜𝑟 2,564.50
DEFERRED ANNUITY
Present value of Deferred Annuity

Where
D - deferment period
N – no. of compounding per year
T – no. of years
Determine the present value of a deferred annuity which will be
replaced by a series of equal annual payments of ₱3,000 each with
the first payment is due at the end of 3 years and the last payment
will be at the end of 8 years. Money is worth 2.75% effective
compounded annually.
PVd  ?
PMT  3,000 pesos
rate  2.75%
n 1
time  8 years
D  3 years
i  0.0275 𝑃𝑉 𝐷 =20,157.73 𝑜𝑟 20,158.96 𝑝𝑒𝑠𝑜𝑠
Determine the present value of a sequence of semi-annual
payments of ₱5,000 each, the first payment is due after 3 ½ years
and the last payment at the end of 8 years. Money is worth 6%
compounded semi-annually.

PVd  ?
PMT  5,000 pesos
rate  6%
n2
time  8 years
D  3.5 years
i  0.03 𝑃𝑉 𝐷 =52,598.63 𝑜𝑟 52,595 𝑝𝑒𝑠𝑜𝑠
 Calculate the amount of money an investment banker would have
to deposit in an investment fund that will provide him ₱10,000 at
the beginning of each month for 11 years. He receives his first
payment 2 years from now and the interest rate is 6%
compounded semi-annually.

PVd  ?
PMT  10,000 pesos
rate  6%
n2
time  11 years
D  2 years
i  0.03 𝑃𝑉 𝐷 =145,836.44 𝑜𝑟 145,845.36 𝑝𝑒𝑠𝑜𝑠
Find the present value of 10 semi-annual payments of ₱2,000 each
if the first payment is due at the end 3 years and money is worth 8%
compounded semi-annually.

PVd  ?
PMT  2,000 pesos
rate  8%
n2
time  5 years
D  3 years
i  0.04 𝑃𝑉 𝐷 =13,333.13 𝑜𝑟 13,331.22 𝑝𝑒𝑠𝑜𝑠
SEATWORK
Ms. Lotus Mandafe makes an investment of ₱1,300 every beginning
of the month in an investment company that credits 3.6% converted
monthly. How much will be in her account at the end of 15 years?

FVa  ?
PMT  3 pesos
rate  3.6%or 0.036
n  12
time  15 years
i  0.003
How much money must Ms. Bernie Carmona pay every end of the year of 3
years and 6 months in a bank that charges 10% per annum on a commercial
loan if she wanted to avail now on a loan of ₱150,000 for additional capital in
her retailing business?
( 𝑃 𝑉 𝑎 )(𝑖 )
𝑃𝑀𝑇 =
PVa  150,000 pesos 1 − ( 1 +𝑖 )
− 𝑛𝑡

PMT  ?
(150,000)( 0.10)
rate  10%or 0.10 𝑃𝑀𝑇 = −( 1) ( 3.5)
1− ( 1+0.10 )
n 1
time  3.5 years
i  0.10 𝑃𝑀𝑇 =52,882.18
Mr. Abner Aquino have already started depositing ₱9,000 at the end of each 6
months in a trust fund that credits 5.5% compounded every 6 months. How
much will be in his fund at the end of 6 years?

FVa  ?  1  i nt - 1
FVa  PMT  
PMT  9,000 pesos  i 
rate  5.5%or 0.055  (1  0.0275) 26 - 1
FVa  9,000 
n2  0.0275 
time  6 years FVa  125,929.24 pesos
i  0.0275
Hope borrows money for the renovation of her house and repays by
making yearly payments of ₱50,000 at the beginning of each year
for a period of 10 years at an interest rate of 8% compounded
annually. How much did Hope borrow?
Mr. Jose De Los Angeles deposits ₱3,500 every end of the month at the
Philippine Ordinary Bank (POB) that credits 2.4% compounded monthly for 6
months. How much money does he have at the end of 6 months?

FVa  ?  1  i nt - 1
FVa  PMT  
PMT  3,500 pesos  i 
rate  2.4%or 0.024  (1  0.002)120.5 - 1
FVa  3,500 
n  12  0.002 
time  0.5 year FVa  21,105.28 pesos
i  0.002
Rose work very hard because she wants to have enough money in her retirement
account when she reaches the age 60. She wants to withdraw ₱36,000 every end
of 3 months for 20 years starting 3 months after she retires. How much must Rose
deposit at retirement at 12% per year compounded quarterly for the annuity?
PVa  ?
PMT  36,000 pesos
rate  12%or 0.12
n4
time  20 year
i  0.03
𝑃 𝑉 𝑎 =1,087,227.48𝑝𝑒𝑠𝑜𝑠
What amount must be deposited every end of the year in an
account that credits 1.24% compounded annually in order to
accumulate ₱500,000 at the end of 5 years?

FVa  500,000 pesos ( 𝐹𝑉 𝑎 )(𝑖)


𝑃𝑀𝑇 =
PMT  ? ( 1+𝑖 )
𝑛𝑡
−1
rate  1.24%or 0.0124 (500,000)( 0.0124)
n 1 𝑃𝑀𝑇 = 1( 5)
( 1+0.0124 ) −1
time  5 years
i  0.0124 𝑃𝑀𝑇=97,550.56𝑝𝑒𝑠𝑜𝑠
Problem 1

Aaron’s mother save ₱5,000 at the end of


every 6 months in an education plan that
earns 6% per year compounded semi-
annually. What is the amount at the end of
18 years?
Problem 2

Romano’s parents saved for his college


education by investing ₱12,000 at the
beginning of each year in an education plan
that earns 6% per year compounded annually.
What is the total amount of investment at the
end of 16 years?
Problem 3

A factory owner saves at the beginning of


every 2 months in order to replace one of his
machines in the factory that costs ₱2,500,000
after 5 years. If money is invested in a fund
that credits 1.56% compounded bi-monthly,
how much should he save every 2 months?

You might also like