Simple and General Annuity

SIMPLE AND
GENERAL
ANNUITY
Learning Objectives:
• illustrates simple and general annuities.
• distinguishes between simple and general annuities.
• finds the future value and present value of both simple annuities and general
annuities.
DEFINITION OF
TERMS
Definition of Terms
• Annuity - a sequence of payments made at equal (fixed) intervals or periods of
time
• Payment interval - the time between successive payments
• 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 an annuity,
• F - sum of future values of all the 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
DEFINITION OF
TERMS
Definition of Terms
• Annuity - a sequence of payments made at equal (fixed) intervals or periods of
time
• An annuity is a series of payments made at equal intervals.[1] Examples of annuities are
regular deposits to a savings account, monthly home mortgage payments, monthly
insurance payments and pension payments.
• An annuity is a contract between you and an insurance company in which you
make a lump-sum payment or series of payments and, in return, receive regular
disbursements, beginning either immediately or at some point in the future.
• Annuities are insurance contracts that promise to pay you regular income
immediately or in the future
• An annuity is a series of payments made at equal intervals.[1] Examples of
annuities are regular deposits to a savings account, monthly
home mortgage payments, monthly insurance payments and pension
payments.
EXAMPLE 1. Suppose Mrs. Remoto would like to save P3,000 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 6 months?
Example 2. In order to save for her high school graduation, Marie decided to save P200 at the end of
each month. If the bank pays 0.250% compounded monthly, how much will her money be at the end
of 6 years?
Example 2. In order to save for her high school graduation, Marie decided to save P200 at the end of
each month. If the bank pays 0.250% compounded monthly, how much will her money be at the end
of 6 years?
Definition. The cash value or cash price is equal to the down payment (if there
is any) plus the present value of the installment payments.
EXAMPLE 3. Mr. Santos 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
Periodic payment R can also be solved using the formula for amount F or present value
P of an annuity.
Periodic payment R of an Annuity
Periodic payment R can also be solved using the formula for amount F or present value
P of an annuity.
2. Mr. Santos would like to save PHP 500 000 for
his son’s college education. How much should he
deposit in saving account every 6 months for 12
years if interest is 1% compounded semi-
annually?
ACTIVITY:
Find the periodic payment of the following.
1.Monthly payment of the future value of PHP 50 000 for 1 year
with an interest rate of 10% compounded monthly
2.Quarterly payment of an accumulated amount of PHP 80 000
for 2 years with an interest rate 0f 8% compounded quarterly.
3.Payment every six months for the present value of PHP 100
000 for 2 years with an interest rate of 12% compounded semi-
annually.
ADDITIONAL EXAMPLES
SIMPLE ANNUITY
1. Aling Marites started to deposit PHP 2000 quarterly in a fund that pays
5.5% compounded quarterly. How much will be in a fund after 6 years?
Given
R = 2000 m=4 I = 5.5% = 0.055
t=6
ADDITIONAL EXAMPLES
SIMPLE ANNUITY
2. The buyer of a house and lot pays PHP 200 000 cash and
PHP 10 000 every month for 20 years. If money is 9%
compounded monthly, how much is the cash value of the house
and lot?
R = 10000 m = 12 I
= 9% = 0.09 t = 20
DOWNPAYMENT PHP 200 000
ADDITIONAL EXAMPLES
SIMPLE ANNUITY
3. Grace borrowed PHP 150 000 payable in 2 years. To repay the loan, she must pay an amount
every month with an interest rate of 6% compounded monthly. How much should he pay every
month
P = 150 000 m = 12 I = 6%
= 0.06 t = 2 years
SOLUTIONS
ADDITIONAL EXAMPLES
SIMPLE ANNUITY
4. Mr Ribaya would like to save PHP 500 000 for his son’s college education. How much should
he deposit in a savings account every 6 months for 12 years if interest is at 1% compounded semi-
annually?
F = 5000 000 m=2 I = 1%
= 0.01 t = 12 years
SOLUTIONS
ADDITIONAL EXAMPLES
SIMPLE ANNUITY
5. A refrigerator is for sale at PHP 17 999 in cash or on terms, PHP 1 600 each month for the next
12 months. Money is 9% compounded monthly. Which is lower, the cash price or the present
value of the installment terms?
Given
Cash Price PHP 17 999
R = 1 600 m = 12 I = 9%
= 0.09 t = 1 years
SOLUTIONS
ADDITIONAL EXAMPLES
SIMPLE ANNUITY
ACTIVITY: SOLVE THE GIVEN PROBLEMS OF ANNUITY

1. If you invest PHP 1500 per month at 6% compounded monthly, how
much will your investment be worth in 25 years?
2. A company contributes PHP1270 per month into a retirement fund

paying 4% compounded monthly and employees are permitted to invest
up to PHP 2,400 per year into another retirement fund which pays 4%
compounded annually. How large can the combined retirement fund be
worth in 26 years?
GENERAL ANNUITY
It is an annuity where the length of the payment
interval is NOT the same length of the interest
compounding period.
2. A teacher saves PHP 5 000 every 6 months in a bank that pays 0.25% compound monthly. How much
will be her savings after 10 years?
Given R = 5000
n = 20 payments m = 12 m=2 t = 10
STEP 1 Convert 0.25% compounded monthly to its equivalent interest rate for each semi – annual
payment interval
𝑖12 𝑖2
𝑗1 = 𝑗 2=
12 2
Step 2 Apply the formula in finding the future value of an ordinary annuity using the computed
equivalent rate
STEP 1 Convert 0.25% compounded monthly to its equivalent interest rate for
each semi – annual payment interval
Note = compounded semi - annually

3. Ken borrowed an amount of money from Kat. He agrees to pay the principal plus interest by
paying ₱38,973.76 each year for 3 years. How much money did he borrow if interest is 8%
compounded quarterly?
Given: R = ₱38,973.76; i (m) = 8% or 0.08; m = 4; n = 1 x 3 = 3

Using the same process in example 5, j = 0.08243216, Find : P
216
Step 2 Apply the formula in finding the present value of an ordinary annuity using the computed
equivalent rate

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SIMPLE AND

ACTIVITY: SOLVE THE GIVEN PROBLEMS OF ANNUITY

2. A company contributes PHP1270 per month into a retirement fund

Note = compounded semi - annually

Given: R = ₱38,973.76; i (m) = 8% or 0.08; m = 4; n = 1 x 3 = 3

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