WEEKLY LEARNING ACTIVITY SHEET

General Mathematics, Quarter 2, Week 4

GENERAL ANNUITY AND DEFERRED ANNUITY

Name: ___________________________________________ Section: ____________________

Learning Objectives:
- finds the future value and present value of general annuities(M11GM-IId-1).
- calculates the fair market value of a cash flow stream that includes an annuity
(M11GM-IId-2).
- calculates the present value and period of deferral of a deferred annuity(M11GM-IId-3)

- Time Allotment: 4 hours

Key Concepts
General Annuity
• A General Annuity is an annuity where the length of the payment interval is not the same
as the length of the interest compounding period.
• A General Ordinary Annuity is a general annuity in which the periodic payment is made at
the end of payment interval.
• Example of general annuity:
1. Monthly installment payment of a car, lot or house with an interest rate that is
compounded annually.
2. Paying a debt semi-annually when the interest is compounded monthly.
• Future and Present Value of a General Ordinary Annuity. The Future value F and
present value P of a general ordinary annuity is given by:

𝒊𝒊 𝒎𝒎𝒎𝒎 𝒊𝒊 −𝒎𝒎𝒎𝒎
(𝟏𝟏 + ) − 𝟏𝟏 𝟏𝟏 − (𝟏𝟏 + ) − 𝟏𝟏
𝒎𝒎 𝑎𝑎𝑎𝑎𝑎𝑎 𝑷𝑷 = 𝑹𝑹[ 𝒎𝒎 ]
𝑭𝑭 = 𝑹𝑹[ ] 𝒊𝒊
𝒊𝒊
𝒎𝒎 𝒎𝒎

𝒊𝒊
Note: 𝒋𝒋 = , 𝒏𝒏 = 𝒎𝒎𝒎𝒎
𝒎𝒎
Where: 𝑅𝑅 = is the regular payment
𝒋𝒋 = is the equivalent interest rate per payment interval converted from the interest
rate per period
𝒏𝒏 = number of payments

Example 1. Cris started to deposit P1,000 monthly in a fund that pays 6% compounded
quarterly. How much will his fund after 15 years?

GIVEN: 𝑅𝑅 = 1,000, 𝑛𝑛 = 12(15) = 180 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝, 𝑖𝑖(4) = 0.06 𝑚𝑚 = 4 , Find 𝐹𝐹

SOLUTION:

The Cash Flow for this problem is shown in the diagram below.

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]
 Cash Flow
F
1000 1,000 1,000 . . . . . . . . . . . 1,000 1,000
0 1 2 3 . . . . . . . . . . . . . 179 180

(1) Convert 6% compounded quarterly to its equivalent interest rate for monthly payment
interval.
𝐹𝐹1 = 𝐹𝐹2
𝑖𝑖 12 12𝑡𝑡 𝑖𝑖 4
𝑃𝑃(1 + ) = 𝑃𝑃(1 + )4𝑡𝑡
12 4
𝑖𝑖 12 𝑖𝑖 4
(1 + )12𝑡𝑡 = (1 + )4𝑡𝑡
12 4
𝑖𝑖 12 0.06 4
(1 + )12 = (1 + )
12 4
𝑖𝑖 12 12
(1 + ) = (1.015)4
12
1
𝑖𝑖 12
(1 + ) = ((1.015)4 )12
12
1
𝑖𝑖 12
(1 + ) = (1.015)3
12
1
𝑖𝑖 12
= (1.015)3 − 1
12
𝑖𝑖 12
= 0.00497521 = 𝑗𝑗
12
Thus, the interest rate per monthly payment interval is 0.497521%
(2) Apply the formula in finding the future value of an ordinary annuity using the
computed equivalent rate.

(1+𝑗𝑗)𝑛𝑛 −1
𝐹𝐹 = 𝑅𝑅[ ]
𝑗𝑗

(1+0.00497521)180 −1
𝐹𝐹 = 1,000[ ]
0.00497521

𝐹𝐹 = 290,082.51

Thus, Cris will have P290,082.51 in the fund after 20 years.

• A Cash flow is a term that refers to payments received (cash inflows) or payment or deposits
made (cash outflows). Cash inflows can be represented by positive numbers and cash
outflows can be represented by negative numbers.
• The Market value or economic value of a cash flow (payment stream) on a particular date
refers to a single amount that is equivalent to the value of the payment stream at that date.
This particular date is called focal date.
Example 2. Mr. Ribaya received two offers on a lot that he wants to sell. Mr. Ocampo has
offered P50,000 and a P1million lump sum payment 5 years from now. Mr. Cruz has offered
P50,000 plus P40,000 every quarter for five years. Compare the fair market value of the two
offers if money can earn 5% compounded annually. Which offer has a higher market value?
Mr. ocampo’s Offer Mr. Cruz’s Offer
P50,000 down payment P50,000 down payment
P1,000,000 after 5 years P40,000 every quarter for 5 years
Find the market value of each offer.
Solution.
We illustrate the cash flows of the two offer using time diagram

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]
 Mr. Ocampo’s Offer

50,000 1 million

0 1 2 3 4 5

Mr. Cruz’s Offer

50,000 40,000 40,000 40,000 . . . . . . . .. . 40,000

0 1 2 3 . . . . . . . . . . . . . . . . 20

Choose a focal date and determine the values of the two offers at that focal date. For example
the focal date can be the date at the start of the term.
Since the focal date is at t = 0, compute for the present value of each offer.

Mr. Ocampo’s Offer: Since P50,000 is offered today, then its present value is still
P50,000. The present value of P1,000,000 offred 5 years from now is
𝑷𝑷 = 𝑭𝑭(𝟏𝟏 + 𝒋𝒋)−𝒏𝒏
𝑷𝑷 = 𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎, 𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏 + 𝟎𝟎. 𝟎𝟎𝟎𝟎)−𝟓𝟓
𝑷𝑷 = 𝟕𝟕𝟕𝟕𝟕𝟕, 𝟓𝟓𝟓𝟓𝟓𝟓. 𝟐𝟐𝟐𝟐

Fair Market Value (FMV) = DOWNPAYMENT + PRESENT VALUE

FMV = 50,000 + 783,526.20
FMV = 833,526.20

Mr. Cruz’s Offer: We first compute for the present value of a general annuity with
quarterly payments but with annual compounding period at 5%.
Solve the equivalent rate, compounded quarterly of 5% compounded annually.
𝐹𝐹1 = 𝐹𝐹2
𝑖𝑖 4 𝑖𝑖 1
𝑃𝑃(1 + )4(5) = 𝑃𝑃(1 + )1(5)
4 1
𝑖𝑖 4 20 0.05 5
(1 + ) = (1 + )
4 1
1
𝑖𝑖 4
(1 + ) = (1.05)5(20)
4
1
𝑖𝑖 4 5� �
= (1.05) 20 − 1
4
𝑖𝑖 4
= 0.012272234
4
The present value of an annuity is given by
1−(1+𝑗𝑗)−𝑛𝑛
𝑃𝑃 = 𝑅𝑅[ ]
𝑗𝑗
1−(1+0.012272) −20
𝑃𝑃 = 40,000[ ]
0.012272

𝑃𝑃 = 705,572.70

FAIR MARKET VALUE (FMV) = DOWNPAYMENT + PRESENT VALUE

FMV = 50,000 + 705,572.70
FMV = 755,572.70

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]
 Hence, Mr. ocampo’s Offer has a higher market value. The difference between the market
values of the two offers at the start of the term is 833,526.20 – 756,572.70 = P77,953.50

Key Concepts
Deferred Annuity
• A DEFERRED ANNUITY is a kind of annuity whose payments (or deposits) start in more
than one period from the present.
• PERIOD OF DEFERRAL is the time between the purchase of an annuity and start of the
payments for the deferred annuity.
• Illustration

R* R …………….. R* R R… R
0 1 2 k k+1 k+2 k+n

Time Diagram for a Deferred Annuity

In the time diagram the period of deferral is k because the regular payments of R
start at the time k+1.
The rotation R* represents k” artificial payments”, each equal to R but are not
actually paid during the period of deferral.

• PRESENT VALUE OF A DEFERRED ANNUITY. The present value of k-year deferred

annuity at interest rate I compounded m times a year with regular payments R for t years
is given by:
𝒊𝒊
𝒊𝒊 𝟏𝟏−(𝟏𝟏+𝒎𝒎)−𝒎𝒎𝒎𝒎
𝑷𝑷 = (𝟏𝟏 + )−𝒌𝒌𝒌𝒌 𝑹𝑹 � 𝒊𝒊 �
𝒎𝒎
𝒎𝒎

Where:
P = Present value of the deferred annuity
R = regular payment
m = compounding periods
i = interest rate
k = period of deferral
t = time

• Example 3. A certain fund is to be established today in order to pay for the P5,000 worth
of monthly rent for a commercial space. If the payments for rent will start next year and the
fund must be sufficient to pay for the monthly rental for 2 years, how much must be
deposited at 2.5% interest compounded monthly?

Solution:
Consider a 3-year timeline for the illustration. Since the payment will start next year,
then the first year (12 compounding periods) is known as the period of deferral.
The payment will start at the end of the 12th month and end at the end of the 36th
month.

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]
 Time(in months) 0 1 2 . . . . . . . . . 12 13 14 15 16 . . . . 35 36

Period of Deferral Payment Period

GIVEN: R = 5,000, i = 0.025, m = 12, t = 2 ( since the payment period is 2 years)

𝒊𝒊
𝒊𝒊 𝟏𝟏−(𝟏𝟏+𝒎𝒎)−𝒎𝒎𝒎𝒎
𝑷𝑷 = (𝟏𝟏 + )−𝒌𝒌𝒌𝒌 𝑹𝑹[ 𝒊𝒊 ]
𝒎𝒎
𝒎𝒎
𝟎𝟎.𝟎𝟎𝟎𝟎𝟎𝟎
𝟎𝟎.𝟎𝟎𝟎𝟎𝟎𝟎 −𝟏𝟏(𝟏𝟏𝟏𝟏) 𝟏𝟏−(𝟏𝟏+ 𝟏𝟏𝟏𝟏 )−(𝟏𝟏𝟏𝟏(𝟐𝟐))
𝑷𝑷 = (𝟏𝟏 + ) 𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎[ 𝟎𝟎.𝟎𝟎𝟎𝟎𝟎𝟎 ]
𝟏𝟏𝟏𝟏
𝟏𝟏𝟏𝟏
𝟏𝟏 − (𝟏𝟏. 𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎)−𝟐𝟐𝟐𝟐
𝑷𝑷 = (𝟏𝟏. 𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎)−𝟏𝟏𝟏𝟏 (𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎)[ ]
𝟎𝟎. 𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎𝟎
𝑷𝑷 = (𝟎𝟎. 𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗) (𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎)[𝟐𝟐𝟐𝟐. 𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑]
𝑷𝑷 = (𝟎𝟎. 𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗𝟗)(𝟏𝟏𝟏𝟏𝟏𝟏, 𝟗𝟗𝟗𝟗𝟗𝟗. 𝟔𝟔𝟔𝟔𝟔𝟔𝟔𝟔)
𝑷𝑷 = 𝟏𝟏𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎. 𝟓𝟓𝟓𝟓
Thus, the amount of deposit needed today is P114,046.58.

Payment Period

Time(in months) 0 1 2 . . . . . . . . . 12 13 14 15 16 . . . . 35 36

P116,930.64
P114,046.58

Notice that there are two stages in finding the present value of a deferred annuity: (1) find
the value of the payment at the start of the payment period by using the formula for the present
value of an annuity, and then (2) fin the value of the amount to be obtained at the start (or time
0) by using the formula for the present value of a single amount given in the formula of the resent
value of a deferred annuity.
If the period is k-years, you call the annuity a k-year deferred annuity

Activities
Activity No. 1:
Instruction: Answer the questions briefly. Write your answer on the space provided.

1. Differentiate General Annuity and General Ordinary Annuity?

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]
 2. Express the process in finding the Present and future value of General ordinary annuity.

3. What is the formula in finding the Fair Market Value?

4. Express the process in finding the Fair Market Value.

5. Differentiate Deferred Annuity and Period of Deferrral

Activity No. 2:
Instruction: Solve the following problems and show your solutions. Write your answers on the
space provided. Refer to the Scoring Rubric below.
a. Which Offer has a better Fair Market Value?
Company A offers P150,000 at the end of 3 years plus P300,000 at the end of 5 years.
Company B offers P25,000 at the end of each quarter for the next 5 years. Assume that
money is worth 8% compounded annually.

COMPANY A COMPANY B
P150,000 at the end of 3 years P25,000 at the end of each
P300,000 at the end of 5 years quarter for 5 years

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]
 b. ABC bank pays interest at the rate of 2% compounded quarterly. How much will Ken have
in the bank at the end of 5 years if he deposits P3,000 every month?

c. A loan is to be repaid quarterly for 5 years that will start at the end of 2 years. If interest
rate is 6% converted quarterly, how much is the loan if the quarterly payment is P10,000?

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]
Scoring Rubric
DISTINGUISHED-4 PROFICIENT-3 APPRENTICE-2 NOVICE-1
Understands Identifies special factors Understands the Understands Doesn't
the Problem that influences the problem enough to solve understand
approach before part of the problem enough to get
starting the problem or to get part of the started or
solution make
progress
Uses Explains why certain Uses all appropriate Uses some Uses
Information information is essential information appropriate inappropriate
Appropriately to the solution correctly information information
correctly
Applies Explains why Applies completely Applies some Applies
Appropriate procedures are appropriate appropriate inappropriate
Procedures appropriate for the procedures procedures procedures
problem
Uses Uses a representation Uses a Uses a Uses a
Representations that is unusual in its representation that representation that representation
mathematical precision clearly depicts the gives some that gives
problem important little or no
information about significant
the problem information
about the
problem
Answers the Correct solution of Correct solution Copying error, No answer or
Problem problem and made a computational wrong answer
general rule about the error, partial based upon
solution or extended the answer for problem an
solution to a more with multiple inappropriate
complicated solution answers, no answer plan
statement, answer
labeled incorrectly

Reflection
How can I apply the knowledge I gained from this activity in real life settings?

References
Enterina, Angelie D. General Mathematics – Grade 11
Alternative Delivery Mode. Quarter 2 – Module 7: Annuities
First Edition. Department of Education – Bureau of Learning Resources (DepEd –
BLR).2020

Answer Key
Activity No. 1. Answers/outputs are expected to vary.
Activity No. 2. a. Company B offer is preferable since its market value is larger.
b. F=P189,126.38
c. P=154,694.04

Author: MARGIE B. ALALAN

School/Station: Tagbina National High School, Tagbina I
Division: Surigao del Sur
Email Address: [email protected]