GENERAL MATHEMATICS

UNIT 2
ANNUITIES

TOPIC LEARNING OUTCOMES

At the end of the lesson, you should be
able to:
1. illustrate and distinguish between simple
and general annuities.
2. find the future value and present value of
both simple annuities and general
annuities.
3. calculate the fair market value of a cash
flow stream that includes an annuity.
4. calculate the present value and period of
deferral of a deferred annuity.
GENERAL MATHEMATICS

Before we thoroughly discuss the topics of annuities, let’s try to

examine first three samples of an annuity. Observe the payments or
installments or deposits in each table, then write your observation after
the third table.
 GENERAL MATHEMATICS

What is/are common among them? Write your observation/s below.

1. __________________________________________________________________________

2. __________________________________________________________________________

3. __________________________________________________________________________

4. __________________________________________________________________________
 GENERAL MATHEMATICS

Read “What is an Annuity?” on page 132 of your book/ ebook to

give you more ideas about the concept of annuities.
What are the common examples of an annuity? List some of them.
1. ____________________________________________________
2. ____________________________________________________
3. ____________________________________________________

Read pages 133 – 141 of your book.

You have learned that there are two kinds of annuities, the simple
annuity and the general annuity. Below is a comparison between the two.

ANNUITY

SIMPLE GENERAL
Annuity Annuity

Payment period Payment period

IS THE SAME WITH DIFFERS FROM
Compounding period Compounding period

Example: Example:
Annual payments AND interest is Annual payments BUT interest is
compounded annually. compounded quarterly.

You also learned how to compute the future values and present values of Simple and
General Annuities. Summarize the formulas you have encountered in your reading by
completing the table below.

Simple Annuity General Annuity

Future Value

Present Value
 GENERAL MATHEMATICS

What can you say about the formulas? _______________________________________

The only difference is that for a general annuity, you need to solve for the equivalent rate
of the given interest rate by using the formula for ERI (which was discussed in compound
interest).
Examples:
1. Jimmy paid ₱200 000 cash and agreed to pay ₱20 000 a month for 5 years to purchase a
car. If money is worth 2.25% compounded monthly, what is the cash price of the car?
Solution:
r -mt
1−(1+i)-n 1− (1+m)
PV=A [ ] = A[ r ]= =₱1 126 928.07
i
m

Cash Price = Down payment + Present Value of annuity

= ₱200 000 + ₱1 126 928.07 = ₱1 326 928.07
The cash price of the car is ₱1 326 928.07.

2. Summer’s Construction wants to create a ₱1 650 000 fund that will be used to replace
deteriorating machineries. If money is worth 7.5% compounded semiannually. What equal
deposits must be made at the end of every six months in 10 years to establish the fund?
Solution:
r mt r
(1+i)n -1 (1+m) -1 FV (m )
FV=A [ ] =A [ r ] A= [ r mt
]=
i
m (1+m) -1

Summer’s Construction will have to deposit ₱56 862.46 semiannually to establish the fund.

3. Carol wants to buy a new refrigerator worth ₱29 500 cash. If it can be sold at 20% down
payment and 24 equal monthly payments, find the size of the payment if money is worth 12%
compounded semiannually.
Solution:
Since the paying period (monthly) is not the same as the compounding period (semiannually),
first find the periodic rate compounded monthly equivalent to 12% compounded semiannually.
ERImonthly = ERIsemiannually (1+i)m -1=(1+i)m -1 (1+i)m =(1+i)m

r m 0.12 2
(1+i)m = (1+ ) (1+i)12 = (1+ ) i = 0.009759
m 2

Substitute the computed i to the present value formula.

1−(1+i)-n PV (i)
PV=A [ ] A = [(1+i)n ] = = ₱877.44
i -1
 GENERAL MATHEMATICS

4. Beth deposits ₱9 000 at the end of three months in an investment that pays 8.32% annually.
How long must she make the deposit to accumulate ₱300 000 in preparation for her
wedding?
Solution:
Since the deposit period (quarterly) is not the same as the compounding period (annually), find
the periodic rate compounded quarterly equivalent to 8.32% compounded annually.
ERIquarterly = ERIannually (1+i)m -1=(1+i)m -1 (1+i)m =(1+i)m

r m 0.0832 1
(1+i)m = (1+ ) (1+i)4 = (1+ ) i = 0.0202
m 1

Since the unknown is time t, find n from the future value formula.
FV(i)
(1+i)n -1 log[1- A ]
FV=A [ ] n= - n=
i log(1+i)

From n, you can now solve t using the formula n = mt.

n
n = mt t= t = 13.99 years
m

Beth must make 56 quarterly deposits or 14 years to accumulate the amount.

The fair market value, on the other hand, is used to compare two or more options to
help you in your decision making.
Example:
1. Two appliance stores offer installment plans if you buy a TV set from them. Store A offers a
down payment of ₱5 000 with a monthly installment of ₱1 500 at 5% compounded monthly
for 1 year. Store B offers ₱4 000 quarterly installment at 3.5% compounded quarterly for 1
year and 6 months. Which store has a better plan?
Solution:
In comparing the two options, you may use either the present value or the future value as your
comparison value. In our solution, we will use the present value since there is a down payment
involved.
0.05 -12(1)
1−(1+i)-n 1- (1+ 12 )
Store A: PV=A [ ] = 1 500 [ 0.05 ] = ____________________
i
12

Cash Price = down payment + PV = ₱ 22 521.83

0.035 -4(1.5)
1−(1+i)-n 1- (1+ )
4
Store B: PV=A [ ] = 5 500 [ 0.035 ] = ____________________
i
4

Cash Price = PV, since there is no down payment.

Therefore, Store A offers a better option since its cash price is lower than Store B.
 GENERAL MATHEMATICS

Now, read pages 142 – 143 of your book. The diagrams below show how a deferred annuity
differs from a simple annuity using a pension as an example.

Simple Annuity Deferred Annuity

Note that the start of payout for simple annuity is immediate while the start of payout for
deferred annuity begins after some time.

Example:
1. If money is worth 2.25% compounded monthly, find the present value and the future value of
a sequence of 9 monthly payments of ₱2 300, the first due at the end of 4 months.
Illustration: Present value start of payment Future value

0 1 2 3 4 5 6 7 8 9 10 11 12

deferred periods, nd payment periods, np

Solution:
0.0225 -12(9)
1-(1+i)-np -n 1-(1+
12
) 0.0225 -12(3)
PV=A [ ] (1+i) d = 2 300 [ 0.0225 ] (1+ ) = _________________
i 12
12
GENERAL MATHEMATICS

Now, it’s your turn again to apply what you have learned. Answer
“What Have I Learned So Far?” on pages 138, 140, and 143 of your book..
After answering, you can check your answers using the answer key at the
end of this unit.
Note: This is just a practice. You will not submit this activity.

What Have I Learned So Far? page 138.

What Have I Learned So Far? page 140.

What Have I Learned So Far? Page 143

Answer the following problems. After answering, you can check your
answers using the answer key at the end of this unit.
Note: This is just a practice. You will not submit this activity.

1. Rose Anne wants to buy a house and she was offered by the following options. Which
is the best option for her?

Option 1: ₱200 000 down payment and 10 annual payments of ₱120 000 each, the
first due after 5 years at 6% effective.

Option 2: ₱200 000 down payment and 20 semiannual payments of ₱50 000 each at
8% compounded semiannually.

Option 3: Cash of ₱1 000 000 in 5 years and money is worth 4% compounded

quarterly.

2. Mary Joy bought a life insurance earning 10% compounded annually. Instead of paying
every year, she decided to give her contribution of ₱9 000 every quarter. How much will the
insurance company pay her if she bought a 25-year term plan?

3. Michael wants to buy a car worth ₱850 000 in 5 years. How much must he pay annually for
5 years starting today of money is worth 5% compounded monthly?

4. On retirement, Gilbert finds that his share of a pension fund is ₱1 500 000. If the fund is
invested at 6% compounded quarterly, how many years will Gilbert expect to receive
₱30,000 every three months from his investment?

5. At the end of every 6 months for 5 years, Richard deposits ₱5 000 in a trust fund paying
6% compounded semiannually for his daughter’s education. He then allowed the fund to
accumulate at the same interest rate for 5 more years without making any more deposits.
How much is in the fund after 10 years?
 GENERAL MATHEMATICS

ANSWER KEY
What Have I Learned So Far?

Page 138.
1. FV = ₱24 200.89 2. Mother’s earnings = ₱80 097.87
Page 140
1. PV = ₱73 581.45 2. Option B is better than option A if Yen is the lender
Page 143
1. PV = ₱2 477 046.53 2. PV = ₱247 314.09

Evaluate:
1. Option 3 2. ₱3 673 372.47 3. ₱153 460.29
4. 23.28 years 5. ₱77 032.48

REFERENCES
[Albert Einstein with his quote]. (n.d.). https://medium.com/@aryanagarwal19999/the-
extraordinary-power-of-compound-interest-bc7533960663
[Piggy bank with bank]. (n.d.). Https://Www.Angelbroking.Com/Compound-Interest-Calculator.
https://www.angelbroking.com/compound-interest-calculator
[Plan + Retirement]. (n.d.). https://www.hdfclife.com/insurance-knowledge-centre/retirement-
planning/evaluate-annuities-for-your-retirement
Modified Pag-IBIG 2 - Frequently Asked Questions. (n.d.).
Https://Www.Pagibigfund.Gov.Ph/FAQ_MP2.Html. Retrieved July 15, 2020, from
https://www.pagibigfund.gov.ph/FAQ_MP2.html
Smart and Sun 6-Month Installment Payment Program. (n.d.).
Https://Help.Smart.Com.Ph/Article/Installment-Payment-Program. Retrieved July 15, 2020, from
https://help.smart.com.ph/article/installment-payment-program
S.S.S.I.N.Q.U.I.R.I.E.S.A.D.M.I.N.I.S.T.R.A.T.O.R. (2020, April 4). SSS Inquiries.
Https://Sssinquiries.Com/Loan/How-to-Apply-Sss-Salary-Loan-Online-2020/.
https://sssinquiries.com/loan/how-to-apply-sss-salary-loan-online-2020/