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Learning Competencies
• Illustrates simple and general annuties. M11GM-IIc-1
• Distinguishes between simple and general annuities. M11GM-IIc-2
• Finds the future value and present value of both simple annuities and general annuities. M11GM-IIc-d-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

Pre-starter Activity - “Unlocking of Terms”

• Annuity - a sequence of payments made at equal (fixed intervals or periods of time).
• Simple Annuity - the payment interval is also the same as the interest period.
• General Annuity - refers to an annuity where the length of the payment interval is not the same as the length of the
interest compounding period.

Activity 1
• Problem 1: If ₱40,000 is invested for 6 years at 5% compounded quarterly. Solve for the for the future value (F)
and the compound interest (Ic).
• Problem 2: ₱20,000 is invested for 15 years at 5 % compounded semi-annually. Solve for the for the future value
(F) and the compound interest (Ic).

Definition of Terms
• Annuity Payment - the payment for each period is fixed and the compound interest rate is fixed over a specified
time.
• Annuities - accounts associated with streams of annuity payments.
• Regular / Periodic Payment (R) - each payment in an annuity.
• Payment Interval - the time between the successive payments dates of an annuity.
• Future Value or Amount of an Annuity (F) - the sum of the future values of all the payments to be made during
the entire term of the annuity.
• Present Value of an Annuity (P) - The sum of the present values of all payments to be made during the entire term
of the annuity.

Examples of Annuity
• Rental payment
• Monthly pensions
• Monthly payment for car loan
• Educational plan

Classification of Annuities
Annuities
According to Simple Annuity – an annuity where the General Annuity – an annuity where the
payment interval payment intervals is the same as the interest payment intervals is not the same as the
and interest period period interest period.
Ordinary Annuity (or Annuity Immediate) Annuity Due – a type of annuity in which
According to time
– a type of annuity in which the payments are the payments are made at the beginning of
of payment
made at the end of each payment interval each payment interval.
Contingent Annuity - an annuity in which
According to Annuity Certain – an annuity in which
the payments extend over an indefinite (or
duration payments begin and end at definite times
indeterminate) length of time.
Simple Annuity
• the payment interval is also the same as the interest period.

Example:
• ₱50,000 deposited every year for 5 years at 8% per year compounded annually.
o Notice that ₱50,000 was deposited every year and it is compounded annually. Since the compounding
period is similar to the payment interval, then this is a type of simple annuity.

General Annuity
• the length of the payment interval is not the same as the length of the interest compounding period.

Example:
• Monthly installment of a car, lot or house with an interest rate that is compounded annually.
• Paying a debt semi-annually when the interest is compounded monthly.
• Find the amount of annuity of ₱700 every 6 months for 12 years if interest is 6% compounded monthly.
o Here, the payment interval is different than the interest period. This is a general annuity. We must match
the interest period to the payment interval. We must find the semi-annual rate that is equivalent to
6%,compounded monthly.

Future and Present Values of a Simple Annuity

• Present Value (P)
1−(1+i)−n
o P = R[ i
]
o where:
P = present value
R = periodic payment
i = interest rate per period (𝑖=𝑟/𝑚)
m = number of conversion period in a year
n = total number of conversion periods (n=tm)
 • Future Value (F)
(1+i)n −1
o F = R[ ]
i
o where:
F = future value
R = periodic payment
i = interest rate per period (𝑖=𝑟/𝑚)
m = number of conversion period in a year
n = total number of conversion periods (n=tm)

Example:
• You decided to join a Kabataan Savers Club which aims for financial growth of the youth nowadays. If you pay
₱1,000.00 at the end of each month for 5 months on account that pays interest at 12% compounded monthly, how
much money will you have after 5 months?
• Contrast in calculating the future value, a present value (PV) tells you how much money would be required now to
produce a series of payments in the future, again assuming a set interest rate.

Cash Value or Cash Price (CV)

• The cash value or cash price is equal to the down payment (if there is any) plus the present value of the
installment payments.

Example:
• Mr. Angeles paid ₱200,000.00 as a down payment for a car. The remaining amount is to be settled by paying
₱16,200.00 by the end of each month for 5 years. If interest is 10.5% compounded monthly, what is the cash price
of his car?

Try This:
• Mr. Edgar borrowed from his friend ₱200,000.00. He promised to pay the amount plus its interest by an equal
amount of money each year for 3 years. What must be his annual payment if they agreed on an interest of 10%
compounded annually?

Activity 2
• Find the Present Value (P) and the Future Value (F) of quarterly payments of ₱2,000.00 for 5 years with interest
rate of 8% compounded quarterly.
• Find the Present Value (P) and the Future Value (F) of semi-annual payments of ₱8,000.00 for 12 years with interest
rate of 12% compounded semi-annually.
• How much should you invest in a fund each year paying 2% compounded annually to accumulate ₱100,000.00 in
5 years?
• The value of a car requires a ₱169,000.00 cash down payment and a monthly payment of ₱12,000.00 If money is
computed at 10% compounded monthly, how much is the cash price of the car payable in 5 years?
• The buyer of a lot pays ₱50,000.00 cash and ₱10,000.00 every month for 10 years. If money is 8% compounded
monthly, how much is the cash price of the lot?

Future and Present Values of General Annuity

• Present Value (P)
1−(1+i)−n
o P = R [ (1+i)b ]
−1
o where:
P = present value
R = periodic payment
i = interest rate per period
n = total number of conversion periods
 p
b=c where p is the number of months in payment interval and c is the number of months in
compounding period

• Future Value (F)

(1+i)n −1
o F = R [(1+i)b −1]
o where:
F = future value
R = periodic payment
i = interest rate per period
n = total number of conversion periods
p
b = c where p is the number of months in payment interval and c is the number of months in
compounding period

Example:
• What is the present value of an annuity of ₱2,000.00 payable annually for 9 years if the money is worth 5%
compounded quarterly?
• Payment of ₱500.00 is made at each year for 10 years. Interest has a nominal rate of 8% convertible quarterly. Find
the present and the future value.
• Annual payments of ₱1,000.00 at the end of each term for 8 years with interest rate of 6% compounded quarterly.
Find the present and the future value.

Fair Market Value (FMV) of a Cash Flow

Fair Market Value is the price an asset can be sold in the open market when certain conditions are met. The
conditions are as follows: the parties involved are aware of all the facts, are acting in their own interest, are free of any
pressure to buy or sell, and have ample time to make decisions.

Review:
• General Annuity - an annuity where the length of the payment interval is not the same as the length of the interest
compounding period.
• General Ordinary Annuity - general annuity in which the periodic payment is made at the end of the payment
interval.

Example:
Suppose Mrs. Remoto would like to save ₱3,000 at the end of each month for six months, in a fund that gives 9%
compounded monthly. How much is the amount of future value of her savings after 6 months?

Activity 3 – “Concept Mapping”

Directions: Make a concept map from the given words below by arranging the word into an idea and connect by either a
word or a phrase.
Fair Market Value Cash Flow General Ordinary Annuity
(1+𝑗)𝑛 −1 1−(1+𝑗)−𝑛
𝐹=𝑅 𝑗
Annuity 𝑃=𝑅 𝑗

Present Value Future Value General Annuity

Cash Flow
Cash flow is a term that refers to payments received (cash inflows) or payments or deposits made (cash outflows).
Cash inflows can be represented by positive numbers and cash outflows can be represented by negative numbers.
 Fair Market Value or Economic Value of cash flow (payment stream) on a particular date (focal date) refers to a
single amount that is equivalent to the value of the payments stream at that date. In its simplest sense, fair market value
(FMV) is the price that an asset would sell for on the open market.

Example:
• Mr. Ribaya received two offers on a lot that he wants to sell. Mr. Ocampo has offered ₱50,000 and a ₱1 million
lump-sum payment 5 years from now. Mr. Cruz has offered ₱ 50,000 plus ₱40,000 every quarter for five years.
Compare the fair market values of the two offers if money can earn 5% compounded annually. Which offer has a
higher market value?
• Company A offers ₱150,000 at the end of 3 years plus ₱300,000 at the end of 5 years. Company B offers ₱25,000
at the end of each quarter for the next 5 years. Assume that money is worth 8% compounded annually. Which offers
has a better market value?

Deferred Annuity
• Annuity – it is a sequence of equal payment (or deposits) made at a regular interval of time.
1−(1+𝑖)−𝑛
• Ordinary Annuity – an annuity in which the payments are made at the end of every period. 𝑃 = 𝑅 [ 𝑖
]
• Deferred annuities - are series of payments that will start on a later date.
• Deferred Annuity is an annuity that does not begin until a given time interval has passed. It is a kind of annuity
which payments (or deposits) starts in more than one period from the present. It may also be considered as an
insurance contract designed for long-term savings. Unlike an immediate annuity, which starts annual or monthly
payments almost immediately, investors can delay payments from a deferred annuity indefinitely.
• Period of Deferral - is the time between the purchase of an annuity and the start of the payments for the deferred
annuity.
• Time Diagram - In this time diagram, the period of deferral is k because the regular payments of R start at time k
+ 1.

Try This!
• Suppose a senior high school student wants to purchase a cellular phone for online learning. He decided to pay
monthly for 1 year starting at the end of the month. How much is the cost of the cellular phone if his monthly
payment is ₱2,500.00 and the interest rate is 9% compounded monthly?
• What if the senior high school student is considering a different payment scheme to buy the cellular phone? In this
scheme, he has to pay ₱2,500.00 monthly for 1 year starting at the end of the fourth month. If the interest rate is 9%
converted monthly, how much is the cash value of the cellular phone?
• To answer:
o Step 1: Assume payments are also being made during the period of deferral; in other words, there are no
skipped payments. Find the present value of the all the payments.
o Step 2: Find the present value of the payments made during the period of deferral.
o Step 3: Since the payments in the period of deferral are artificial payments, subtract the present value of
these payments from present value P with assumed payments starting the first month up to the fifteenth.
• Take note:
o The two payment schemes have the same number of payments (n) and the same interest rate per period (i).

Present Value (P) of a Deferred Annuity

• To determine the present value of a deferred annuity, find the present value of all k + n payments (including the
artificial payments), then subtract the present value of all artificial payments.
1−(1+𝑖)−(𝑘+𝑛) 1−(1+𝑖)−𝑘
o 𝑃 = 𝑅[ 𝑖
]−𝑅[ 𝑖
]
o where:
P = present value
R = periodic payment
 i = interest rate per period
n = total number of conversion periods
k = number of conversion periods in the deferral or number of artificial payments.

Example:
• Find the present value of 10 semi-annual payments of ₱2,000.00 each if the first payment is due at the end of 3
years and money is worth 8% compounded semi-annually.
• Find the present value of a deferred annuity of ₱1,500.00 every 3 months for 8 years that is deferred 3 years if
money is worth 6% converted or compounded quarterly.

Performance Task “My Savings Account Passbook”

• Objectives:
o Construct a savings account passbook for each group.
o Save money to be used for investment in the future.
o Realize the importance of having savings as a contingency fund.
• Layout
o Date
o Description (Saver)
o Deposit
o Withdrawal
o Balance
o Signature