REVIEW

EQUATION OF VALUE

Equation
OrdinaryofAnnuity
Values
 EQUATIONS OF VALUES
• a mathematical statement which says that the
dated values of two sets of amounts are equal
when brought to a particular point in time (the
comparison date)
• In the context of borrowing, the equation of
values says that
Obligation(s) = Payment(s)
• These sums are obtained by either accumulating
or discounting the debts incurred or the
payments made toward the comparison date.
Equation
OrdinaryofAnnuity
Values
 EQUATIONS OF VALUES

• a mathematical statement which says that the dated

values of two sets of amounts are equal when brought
to a particular point in time (the comparison date)
• In the context of borrowing, the equation of values
says that
Obligation(s) = Payment(s)
• An amount of money due on a given date is brought to
the comparison date by either accumulating or
discounting.

Equation
OrdinaryofAnnuity
Values
4. As payments for debts of Php300,000 due at the end
of 4 years and Php485,000 at the end of 8 years, Jane
agrees to pay Php50,000 at once and Php250,000 at
the end of 5 years. She will make a third and final
payment at the end of 10 years. How much would it
be if money is worth 14% compounded semi-
annually.

300,000 485,000

Obligation(s)
Payment(s) 1 4 5 8 10
50,000 250,000 x
Equation
OrdinaryofAnnuity
Values
 300,000 485,000

Obligation(s)
Payment(s) 1 4 5 8 10
50,000 250,000 x

=
300,000(1.07)12 + 485,000(1.07) 4 =
50,000(1.07) 20 + 250,000(1.07)10 + x
x = Php626,121.48

Equation
OrdinaryofAnnuity
Values
 Exercises
• .

• .

Equation
OrdinaryofAnnuity
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Ordinary Annuity

Ordinary Annuity
 Annuity
a sequence of equal payments made regularly
– Examples: daily wages, periodic payments of
installment purchases, monthly rent, annual
insurance premiums
• Payment interval – the time between
successive payments
• Term – the time between the first and last
payment intervals
• Periodic payment/rent (R) – the amount of
each payment
Ordinary Annuity
 Term

First payment interval Last payment interval

… R
R R R R

• The time between two consecutive payments of annuity is called payment

interval and is equivalent to one period.

• The total number of periods is the same as the total number of payments.

• Payments maybe made monthly, quarterly, semi-annually, annually or at other

periods.

Ordinary Annuity
Types of Annuity
• Simple annuity – an annuity for which the
interest period is the same as the payment
period
– Example: An annuity for which the interest rate is
compounded monthly and payments are also
made monthly
• General annuity – interest and payment
periods do not coincide

Ordinary Annuity
Types of Simple Annuity
• Ordinary annuity – an annuity for which
payments are made at the end of each
interest period.
• Deferred annuity - an annuity wherein the
first payment does not coincide with the first
interest period. The first payment is made at
some later date.

Ordinary Annuity
 RECALL: Geometric Series
• Sum of a certain number of terms of a
geometric sequence.

a1 (1 − r ) n
Sn =
1− r
• Sn is the sum of n terms
• a1 is the first term
• r is the common ratio
Ordinary Annuity
Amount of Ordinary Annuity (S)
The sum of all the periodic payments made at the end
of each term plus all accumulated interests is called the
amount of ordinary annuity, denoted by S. This is the
value at the end of the term; this is the value on the
last payment date.

The sum of the periodic payments made at the end of each term
with accumulated interest is

where R is the periodic payment of the annuity, i is the interest

rate per period and n is the total number of payments or period.
Ordinary Annuity
Present Value of Ordinary Annuity (A)
The present value of an ordinary annuity, denoted by A,
is the sum of the discounted payments at the beginning
of the term. This is the value at the beginning of the
term; this is the value before the first payment.

The sum of the periodic payments discounted to the present

time is

where R is the periodic payment of the annuity, i is the interest

rate per period and n is the total number of payments or period.

Ordinary Annuity
Formulas for the amount S, present value A
and periodic payment R of an ordinary
annuity:

−n
 (1 + i ) − 1
n
1 − (1 + i ) 
S = R  A = R 
 i   i 

Ordinary Annuity
Find A given R = Php13,210, j = 14%, m = 2 and
t = 7 years.

1 − (1 + i ) − n 
A = R 
 i 
1 − 1.07 −14 
= 13,210  
 .07 
= Php115,527.63

Ordinary Annuity
Jane deposits Php14,000 every 3 months in a
savings account that pays 6% compounded
quarterly. Assuming that she does not
withdraw any amount, how much would she
have in her account at the end of 4 years?

 (1 + i ) n − 1 1.01516 − 1
S = R  = 14,000  
 i   .015 
= Php251,053.18

Ordinary Annuity
A multimedia workstation is for sale at
Php28,000 every six months for two years at
12% compounded semi-annually or at
Php20,000 down and Php7,040.15 each
month for the next 12 months at 15%
compounded monthly. Which terms should
you choose?

Ordinary Annuity
Which terms should you choose?

Offer 1 : Offer 2 :
1 − 1.06 −4  1 − 1.0125−12 
A = 28,000  A = 7,040.15 
 .06   . 0125 
= Php97,022.96
CP = 20,000 + A
= Php98,000.02

Offer 1 is better.

Ordinary Annuity
A newly-formed business bought a property
worth Php14.5M. They paid a downpayment
of Php3M with an agreement to pay the
balance in 10 years at 12% compounded
quarterly. How much is the quarterly
payment?
Ai (11,500,000)(.03)
R= −n =
1 − (1+ i) 1 −1.03−40
= Php497,517.35

Ordinary Annuity