NORTHEASTERN CEBU COLLEGES, INC.

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SENIOR HIGH SCHOOL DEPARTMENT

Module 2: Annuities

Name: __________________________________
Grade & Section: _________________________
Allotted Time: November 12-26, 2021

Prepared by:

JEAHME R. SOTTO, LPT

Subject Teacher

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 Email: [email protected]
FB Account: Jeahme Roble Sotto

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 Module 2: Annuities

INTRODUCTION
After completing the tasks of this module, you should be able to:

a. define annuity payment;

b. identify different types of annuity;
c. find the future value and present value of simple annuities; and
d. find the future value and present value of general annuities.

OVERVIEW ON TERMS AND CONCEPTS

Definition of Terms

 Annuity - a fixed sum of money paid to someone at regular intervals, subject to a fixed
interest rate.
 Annuity Certain – payable for a definite duration. Begins and ends on a definite or fixed
date (monthly payment of car loan).
 Annuity Uncertain - annuity payable for an indefinite duration (example: insurance);
dependent on some certain event.
 Simple Annuity - interest conversion or compounding period is equal or the same as
the payment interval.
 General Annuity - interest conversion or compounding period is unequal or not the
same as the payment interval.
 Ordinary Annuity (A0) - annuity in which the periodic payment is made at the end of
each payment interval.
 Annuity Due - an annuity in which the periodic payment is made at the beginning of
each payment interval.
 Deferred Annuity - the periodic payment is not made at the beginning nor at the end of
each payment interval, but some later date.
 General Ordinary Annuity – first payment is made at the end of every payment interval.
 General Annuity Due - first payment is made at the beginning of every payment
interval.
 Perpetuities - a series of periodic payments which are to run infinitely or forever.

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Test I (Simple Annuity). Answer each of the following:
1. ₱ 50 000 is invested for 5 years at 8% compounded quarterly. Give the values of each variable in the
r
formula A=P(1+i)n where i= and n=Kt . (Note: K is the number of times the interest is
K
compounded per year)
(a) P = ____________________
(b) r = ____________________
(c) i = ____________________
(d) n = ____________________
(e) A = ____________________

2. If ₱ 10 000 is invested for 10 years at 6% compounded semi-annually, the final amount is ₱ 18

r
061.11. Give the value of each variable in the formula A=P(1+i)n where i= and n=Kt .
K
(a) P = ____________________
(b) r = ____________________
(c) i = ____________________
(d) n = ____________________

Test II (General Annuity).

To have an amount of ₱ 200 000 at the end of 12 years with interest rate of 12% converted semi-
annually, you must set aside ₱ 3 935.80 semi-annually.
Using the annuity problem above, give the value of each variable in the formula

[ ]
n
1−(1+i)
PV =
i
P=¿ _________________ t=¿ _________________
r =¿ _________________ n=¿ _________________
K=¿ _________________ PV =¿ ________________

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 1: Simple Annuity

The fixed payment for each period, and the compound interest rate that is fixed over a
specified time is called an annuity payment. Accounts associated with streams of annuity
payments are called annuities. While the payment that is made at the end of each period is
called an ordinary annuity. If payment is due at the beginning of each period, the annuity is
called an annuity due. Each payment in an annuity is called the periodic payment. The time
between the successive payments dates of an annuity is called the payment interval. The
interval between the beginning of the first payment period and the end of the last payment
period is called the term of the annuity.

The following are examples of annuities:

 Rent payment
 Pension
 Monthly payment of car loan or mortgage

The flowchart below gives the different kinds of annuities.

Example 1. Determine if the given situations represent simple annuity or general annuity.
a. Payments are made at the end of each month for a loan that charges 1.05% interest
compounded quarterly.
b. A deposit of ₱ 5 500 was made at the end of every three months to an account that earns 5.6%
interest compounded quarterly.

Solution.
a. Since the payment interval at the end of the month is not equal to the compounding interval,
quarterly, the situation represents a general annuity.

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b. Since the payment interval at the end of every three months (or quarterly) is equal to the
compounding interval, quarterly, the situation represents a simple annuity.

Difference Between Ordinary Annuity and Annuity Due

Example 2. Determine whether the situation describes an ordinary annuity or an annuity due.
Justify your answer.
a. Jun's monthly mortgage payment is ₱ 35 148.05 at the end of each month.

b. The rent for the apartment is ₱ 7 000.00 and due at the beginning of each month.

Solution.
a. Because the payments are made at the end of each month, Jun's stream of monthly
mortgage payments is an ordinary annuity.
b. Since the payments come at the beginning of each month, the stream of rental payments is
an annuity due.

Definition.
The future value of an annuity is the total accumulation of the payment 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.

Note: The term future value that has been used with compound interest means the same term
as used with annuity. Future value comes at the end.
Simple Ordinary Annuity
Future Value of Simple Ordinary Annuity Present Value of Simple Ordinary Annuity

[ ] [ ]
n
(1+i) −1 1−(1+ i)
−n
FV =P PV =P
i i
where FV = Future Value or Amount where PV = Present Value or Amount
P = Periodic Payment P = Periodic Payment
i = interest rate per period, i = interest rate per period,
when when
r r
i= where r is the annual i= where r is the annual
K K
rate and K is the number of conversion rate and K is the number of conversion
periods in a year periods in a year
n = total number of conversion n = total number of conversion
periods periods
n=t ∙ K , where t is the n=t ∙ K , where t is the
number of years number of years

Future Value of Simple Ordinary Annuity

Example 3. If you pay P50.00 at the end of each month for 40 years on account that pays
interest at 10% compounded monthly, how much money do you have after 40 years?
r 10 % 0.1
Solution. We are given P = ₱ 50.00, i= = = , and n=t ∙ K=( 40 ) (12 )=480 . To find the
K 12 12
future value, we have,

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 480
0.1
(1+ ) −1
[ ]
n
(1+i) −1 12
FV =P =50 ∙ =₱ 316 203.98
i 0.1
12

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Present Value of Simple Ordinary Annuity
Example 4. Rose works very hard because she wants to have enough money in her retirement
account when she reaches the age 60. She wants to withdraw P36 000 every 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?

Solution. The principal that Rose must deposit at retirement is the present value of the annuity
payments.

[ ]
−n
1−(1+ i)
Using the Formula: PV =P
i
r 12 %
Write the values of P, i, and n. P = ₱ 36 000, i= = or 0.03, and
K 4
n=t ∙ K=( 20 )( 4 )=80

36 000 [ 1−(1+ 0.03)−80 ]

Substitute for P, i, and n. ¿
0.03
Calculate. = ₱ 1 087 227.48

Therefore, Rose needs ₱ 1 087 227.48 at retirement to pay for the annuity.

Simple Annuity Due

Future Value of Simple Annuity Due Present Value of Simple Annuity Due

P [ (1+i)n −1 ] P [ 1−(1+i)−n ]
FV = ∙(1+i) PV = ∙(1+i)
i i
where FV = Future Value or Amount where PV = Present Value or Amount
P = Periodic Payment P = Periodic Payment
i = interest rate per period, i = interest rate per period,
when when
r r
i= where r is the annual i= where r is the annual
K K
rate and K is the number of conversion rate and K is the number of conversion
periods in a year periods in a year
n = total number of conversion n = total number of conversion
periods periods
n=t ∙ K , where t is the n=t ∙ K , where t is the
number of years number of years
Future Value of Simple Annuity Due
Example 5. Suppose Mr. and Mts. Mariano deposited P20 000.00 at the beginning of each year
for 5 years in an investment that earns 10% per year compounded annually, what is the amount
or future value of the annuity?
r 10 %
Solution. We know that P = ₱ 20 000.00, i= = =0.1, and n=t ∙ K=( 5 ) ( 1 )=5
K 1
n
P(1+i) −1 ₱ 20 000 [ (1+ 0.1 )5−1 ]
Thus, FV = ∙ (1+i )= ∙ ( 1+0.1 )=₱ 134 312.20
i 0.1

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 Note: An investment of P20 000.00 at the beginning of each year for 5 years at 10%
compounded annually would return ₱ 134 312.20. This is ₱ 12 210.20 more than when the
investment is done at the end of each year.

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Present Value of Simple Annuity Due
Example 6. Hope borrows money for the renovation of her house and repays by making yearly
payments of ₱50, 000.00 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?
Solution.
Given: P = ₱ 50 000.00

r 10 %
i= = =0.1
K 1
n=t ∙ K=( 5 ) ( 1 )=5

P [ 1−(1+i)−n ]
PV = ∙(1+i)
i

50 000 [1−(1+ 0.08)−10 ]

= ∙(1+ 0.08) Substitute the values of P, I,
0.08
and n.
= ₱ 362 344.40 Calculate.

Hope borrows ₱ 362 344.40.

Regular Payment of an Annuity

In the previous examples, we used the formulas:

[ ]
n
(1+i) −1
1. FV =P to solve the future value or amount of simple ordinary annuity,
i

P [ 1−(1+i)−n ]
2. PV = to solve the present value of simple ordinary annuity,
i

P [ (1+i)n −1 ]
3. FV = ∙(1+i) to solve the future value or amount of simple annuity due,
i
and

P [ 1−(1+i)−n ]
4. PV = ∙(1+i)to solve the present value of simple annuity due.
i

Manipulating these questions, we can solve for the regular payment or periodic payment, P,
using the following formula:

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 Regular Payment (P) of an Annuity
Simple Ordinary Annuity
( FV ) i
P= n
( 1+ i) −1
( PV ) i
P= −n
1−(1+i)
PV = Present Value
FV = Future Value,
i = interest rate per period, where
r
i= where r is the annual rate and K is the number of conversion periods in a year
K
n = total number of conversion periods

Regular Payment (P) of an Annuity

Simple Annuity Due
( FV ) i
P=
[ ( 1+i )n−1 ] (1+i)
( PV ) i
P=
[ 1−(1+i)−n ] (1+i)
PV = Present Value
FV = Future Value,
i = interest rate per period, where
r
i= where r is the annual rate and K is the number of conversion periods in a year
K
n = total number of conversion periods

Regular Payment of a Simple Annuity

Example 7. Mary borrows to buy a car. She has two options to repay her loan. The interest is
compounded monthly.
Option 1: 24 monthly payments every beginning of the month at 12% per year
Option 2: 60 monthly payments every end of the month at 15% per year
Find: a. Mary's monthly payments under each option
b. The interest Mary pays under each option
Solution.
a. For Option 1: 5 000
¿
0.214558211
PV =P 500 000
¿ ₱ 23 303.70
r 12 %
i= = or 0.01 For Option 2:
K 12
n=24 PV =P 500 000

P=? r 15 %
i= = or 0.0125
K 12
( PV ) i
P= n=60
[ 1−(1+i)−n ] (1+i)
P=?
(500 000)(0.01)
¿
[ 1−( 1+0.01 )−24 ] (1+ 0.01) ( PV ) i
P= −n
1−(1+i)

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 (500 000)(0.0125) ¿ ₱ 11894.97
¿
1−(1+0.0125)−60

b. The interest paid is the difference between the total amount paid and the principal borrowed.
For Option 1:
24 payments of ₱ 23 303.70: 24 (23 303.70)=₱ 559 288.80 .
Total interest paid is ₱ 559 288.80−₱ 500 000=₱ 59 288.80.
Thus, the total interest paid is ₱ 59 288.80.

For Option 2:

60 payments of ₱ 11 894.97: 60 ( 11894.97 )=₱ 713 698.20 .

Total interest paid is ₱ 713 698.20−₱ 500 000=₱ 213 698.20 .
Thus, the total interest paid is. ₱ 213 698.20.

Regular Payment of Simple Ordinary Annuity

Example 8. Eva obtained a loan of ₱ 50 000 for the tuition fee of her son. She has to repay the
loan by equal payments at the end of every six months for 3 years at 10% interest compounded
semi-annually. Find the periodic payment.
Solution.
PV =₱ 50 000 r =10 %
r 10 %
t=3 years i= = or 0.05
K 2
K=2 P=?
n=3 ( 2 )=6
( PV ) i
P= −n
1−(1+i)
(50 000)(0.05)
¿
1−(1+ 0.05)−6
¿ ₱ 9 850.87

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13 | P a g e General Mathematics
 2: General Annuity

Amount and Present Value of an Annuity

The present value of an annuity is the principal that must be invested today to provide the
regular payments of an annuity.
The amount of an annuity is the sum of the regular deposits plus interest.

The given situations involve the amount of an annuity:

 Resty saves ₱ 2 000.00 by making equal monthly payments at his bank.
 Donna plans to retrieve a millionaire by making equal semi-annual deposits into h er
retirement savings plan.
The given situations involve the present value of an annuity:
 Ellen plans to repay her loan of ₱ 50 000 by making equal quarterly payments.
 Samson plans to make equal monthly withdrawals from his ₱ I 000 000 retirement income
fund.

Simple and General Annuities

In simple annuity, the interest conversion period is equal or the same as the payment
interval.
A general annuity is an annuity wherein the interest conversion period is unequal or not
the same as the payment interval.

General Ordinary Annuity

Present Value of General Ordinary Annuity

[ ]
−n
1−(1+ i)
PV =P
(1+i)b−1

Future Value of General Ordinary Annuity

FV =P
[ ( 1+i )n−1
b
(1+i) −1 ]
where P=¿ regular payment
r
i=¿ rate per conversion period (i= where r is the annual rate and K is the
K
number of conversion periods in a year)
n=¿ number of conversion periods for whole term (n=t ∙ K , where t is the term of an
annuity)
p
b= , where p is the number of months in a payment interval and c is the number of
c
Example 1: Present Value of General Ordinary Annuity
Find the present value of an ordinary annuity of P2 000 payable annually for 9 years if the
money is worth 5% compounded quarterly.
Solution.
Given: P=₱ 2 000

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 n=9(4)=36
r 5%
i= = or 0.0125
K 4
c=3
p=12
p 12
b= = =4
c 3

[ ]
−n
1−( 1+i )
PV =P
( 1+i )b−1

[ ]
−36
1−(1+ 0.0125)
¿ 2 000
(1+0.0125)4−1

¿ ₱ 14 155.99

Example 2. Present Value of General Ordinary Annuity with Down Payment

The latest cell phone sells for ₱ 5 000.00 down payment and 00 of each quarter for 3 years at
the rate of 8% compounded semi-annually Find the equivalent of the cell phone.
Solution. To get the cash equivalent (CE), add the down payment (D) and the present value
(PV). For PV, we are given:

P=₱ 900 n=3(2)=6

r 8%
i= = or 0.04
K 4
c=6 p=3
p 3
b= = =0.5
c 6

[ ]
−n
1−(1+ i)
PV =P
(1+i)b−1

[ ]
−6
1−(1+0.04)
¿ 900
(1+ 0.04)0.5−1
¿ ₱ 9529.28
CE=DP + PV =5 000+ 9529.28=₱ 14 529.28

Example 3. Future Value of General Ordinary Annuity

₱ 25 000.00 will be invested in an account at the end of each year at 4% compounded semi-
annually. Find the size of the fund at the beginning of the 16th year.
Solution.

P=₱ 25 000 n=15(2)=30

r 4%
i= = or 0.02
K 2
c=6 p=12

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 p 12
b= = =2
c 6

FV =P
[ ( 1+i )n−1
b
(1+i) −1 ]
¿ 25 000
[
( 1+ 0 , 02 )30−1
(1+0.02) −1
2 ]
¿ ₱ 502 080.19

Present Value of General Annuity Due

Present Value of General Ordinary Annuity Due

[ ][ ]
−n
1−(1+ i) i
PV =P +i
i (1+i)b −1

Future Value of General Ordinary Annuity Due

FV =P [ i ][
( 1+ i )n−1 i
(1+ i)b−1
+i
]
where
PV = Present Value
FV = Future Value,
r
i = interest rate per period (i= where r is the annual rate and K is the number of
K
conversion periods in a year)
n = total number of conversion periods (n=t ∙ K , where t is the term of an annuity)
p
b= , where p is the number of months in a payment interval and c is the number of
c

Example 4. Present Value of General Annuity Due

Find the present value of an ordinary annuity of P10 000 payable quarterly for 10 years if the
money is worth 6% compounded semi-annually.
Solution.

[ ][ ]
−n
1−(1+ i) i
PV =P +i
i (1+i)b −1

[ ][ ]
−20
1−(1+ 0.03) 0.03
¿ 10 000 +0.03
0.03 (1+0.03)0.5 −1

¿ 10 000 ( 14.88 ) ( 2.01+ 0.03 )

¿ ₱ 304 227.87
Example 5. Present Value of General Annuity Due with Down Payment
Mr. Samson bought a brand new car for P500 000.00 down payment and P20 000.00 every first
day of each month for 3 years. If payments are based on 8% compounded semi-annually, what
is the total cash price of the car?
Solution. Total Cash Price = Down Payment (DP) + Present Value (PV)

[ ][ ]
−n
1−(1+ i) i
PV =P +i
i (1+i)b −1

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 [ ][ ]
−6
1−(1+ 0.04) 0.04
¿ 20 000 1
+0.04
0.04 6
(1+0.04) −1

¿ 20 000(5.24 )(6.10)
¿ ₱ 643 654.45
Total Cash Price = DP + PV
¿ ₱ 500 000+ ₱ 643 654.45
¿ ₱ 1 143 654.45
Example 6. Future Value of General Annuity Due
Emy wants to save P 100 000 for her first year of college. She deposits P3 500 at the beginning
of each month in an account that earns 4% per year compounded semi-annually. Will Emy have
enough money saved at the end of 2 years?
Solution.

FV =P [
( 1+ i )n−1
i
i
][
(1+ i)b−1
+i
]
¿ 3 500 [(1+ 0.02 )4−1
0.02 ][ 0.02

(1+0.02) −1
1
6
+0.02
]
¿ 3 500(4.12)(6.07)
¿ ₱ 87529.40

Regular Payment (P) of General Annuity

To solve for P in the formulas for PV and FV for General Annuity, we can transform the
formula as follows:

For General Annuity,

P=PV
[
( 1+i )b−1
1−(1+ i)
−n ] P=FV
[
( 1+i )b−1
−n
(1+i) −1 ]
Example 7. Regular Payment of General Ordinary Annuity
Mr. and Mrs. Salazar will need P300 000 in 2 years to start their own business. They plan to
save money by making monthly deposits at the end of each month in an account earning 8%
per year compounded quarterly. How much must they make monthly?
Solution.

P=FV
[
( 1+i )b−1
−n
(1+i) −1 ]
[ ]
1
3
( 1+0.02 ) −1
P=30 000 −8
(1+i) −1

¿ ₱ 11547.16

17 | P a g e General Mathematics
18 | P a g e General Mathematics
Lesson 1: Simple Annuity
A. Match the terms in column A to the statements in column B.

A B

______ 1. Present Value a. Periodic payment is made at the

end of each payment interval
______ 2. Future Value
[ ]
n
(1+i) −1
b. P
i
______ 3. Ordinary Annuity
P [ 1−(1+i)−n ]
c.
i
______ 4. Annuity Due d. Number of Payments per year
e. Series of payments made at equal
______ 5. Annuity
interval
f. Periodic payment is made at the
beginning of each payment interval

B. Find the amount of each simple ordinary annuity.

1.) ₱ 3 500.00 deposited every 6 months for 2.) ₱ 10 000.00 deposited every quarter for
10 years at 8% per year compounded semi- 12 years at 6% per year compounded
annually. quarterly.

C. Solve the problem. Show your solution.

Cesar wants to have ₱50 000 in 4 years by saving equal regular deposits. He can make a deposit
at the end of each month in account earns 8.5% per year compounded monthly. How much must he
deposit to achieve his goal?

19 | P a g e General Mathematics
Lesson 2: General Annuity
A. Use the given situation to give the values of the following variables:

The present value of an annuity of ₱ 5 000 every end of 3 months for 10 years when the interest
rate is 4% compounded annually is ₱ 164 631.30.

1.) P=¿_____________ 6.) i=¿ _____________

2.) t=¿_____________ 7.) c=¿_____________

3.) K=¿_____________ 8.) p=¿_____________

4.) n=¿_____________ 9.) b=¿_____________

5.) r =¿_____________ 10.) PV =¿____________

B. Solve the following problem. Show your solution.

1. If the interest is 8.5% compounded annually, what is the present value of ₱7 500 payable at the
end of each six months for 8 years?

2. A bank charges 12% interest compounded quarterly for loans. Find the periodic payment if
₱20,000 is to be repaid every end of six months for 10 years.

Performance task:
Make a research on some strategies a homeowner can use to reduce
the total interest paid on mortgage. You may illustrate a sample situation.
Write or print it on a long bond paper.

“Your talents and abilities will improve over time, but for that you have to start.”
---Martin Luther King

20 | P a g e General Mathematics