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Annuity

An annuity is a series of fixed periodic payments made over a specified period of time. There are different types of annuities including simple annuities, annuities due, deferred annuities, and annuities certain. The document provides examples of how to calculate the future value and present value of annuities using tables and formulas. It also gives advice to a couple on how investing in a 5-year annuity could help them save for a down payment on a house.

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Reese Victoria C. Torres
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76 views16 pages

Annuity

An annuity is a series of fixed periodic payments made over a specified period of time. There are different types of annuities including simple annuities, annuities due, deferred annuities, and annuities certain. The document provides examples of how to calculate the future value and present value of annuities using tables and formulas. It also gives advice to a couple on how investing in a 5-year annuity could help them save for a down payment on a house.

Uploaded by

Reese Victoria C. Torres
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Annuity

Lesson 3
Annuity
Lesson 3

If the payment for each period is


fixed, and the compound interest
rate is fixed over a specified time,
the payment is called an annuity
payment.
Objectives
• Define annuity
• Identify different types of annuity
• Find the future value and present value of simple annuities
• Solve problems involving consumer loan (amortization)
Annuity

Source: https://youtu.be/WVbDZ-nBIXk
How it works…

You pay a large sum of Your money grows through an The insurance company
money insurance company starts paying you a small
sum of money every month
How it works…
Kinds of Annuities
Ordinary Annuity

Simple Annuity Annuity Due

Deferred Annuity

Annuity Certain

Annuity General Ordinary


Annuity
Annuity Uncertain

General Annuity General Annuity Due

Perpetuities
Kinds of Annuities
Ordinary Annuity
Periodic payment is made
at the end of each
Payable for a definite payment interval
duration Simple Annuity Annuity Due
Periodic payment is made
at the beginning of each
payment
Compounding interval
period = Deferred Annuity
Payment interval
Annuity Certain Periodic payment is made
Compounding period not date
at a later
Annuity equal to Payment interval General Ordinary
Annuity
Annuity Uncertain

General Annuity General Annuity Due


Fixed sum of money paid Series of periodic payment
to someone at regular which runs infinitely or
Annuity payable for an
intervals, subject to a fixed forever Perpetuities
indefinite duration
compound interest rate
Mr. and Mrs. Mariano are
planning to have their own
home but have limited budget.
They went to a bank for some
advices as to how they can
produce enough amount for the
down payment on a house and
lot they have chosen. This is the
advice of the bank.
Mr. and Mrs. Mariano are
planning to have their own
home but have limited budget.
They went to a bank for some
advices as to how they can
produce enough amount for the
down payment on a house and
lot they have chosen. This is the
advice of the bank.
If you will invest P20,000.00 at the end of
each year for 5 years in an account that
that pays interest at 10% compounded
annually, you will have the amount for
the down payment of the house and lot at
the end of 5 years.
Which house did the couple choose?
A B C

P850,740 P122,102 P211 000


The diagram below will help you answer the questions that
follow
0 1 2 3 4 5
P20000 P20000 P20000 P20000 P20000

P20 000.00
P22 200.00

P24 200.00

P26 620.00

P29 282.00
Adding the amount for each year…

0 1 2 3 4 5
P29 282.00 P26 620.00 P24 200.00 P22 200.00 P20 000.00

Total: P122 102.00


We can use a table to organize the calculations.
Compounded
Period Payment per Period Amount at 5 years
Annually
1 P20 000 20 000 (1 + 0.1)4 P29 282.00
2 P20 000 20 000 (1 + 0.1)3 P26 620.00
3 P20 000 20 000 (1 + 0.1)2 P24 200.00
4 P20 000 20 000 (1 + 0.1)1 P22 200.00
5 P20 000 20 000 (1 + 0.1)0 P20 000.00
TOTAL P122 102.00

Since most annuities involve relatively small periodic payment and longer period of
time, they are affordable for the average persons. If longer periods of time are
involved, the procedure we have done will be very tedious; hence, formulas are
needed to simplify computations of the future value of annuity.
Definition:
The future value of an annuity is the total accumulation of
the payments and interest earned.

The present value of an annuity is the principal that must


be invested today to provide the regular payments of an
annuity.

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