Simple and General Annuity

Vocabulary List:
▪ Annuity – a fixed sum of money paid to
someone at regular intervals, subject to a fixed
compound interest rate
▪ Annuity Certain – payable for a definite
duration. Begins and ends on a definite or fixed
date.
▪ Annuity Uncertain – annuity payable for an
indefinite duration.
▪ Simple Annuity – interest conversion or
compounding period is equal or the same as the
payment interval.
Vocabulary List:
▪ General Annuity – interest conversion or
compounding period is unequal or not the same
as the payment interval.
▪ Ordinary Annuity – 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 mad at the beginning of every
payment interval.
▪ Perpetuities – a series of periodic
payments which are to un infinitely or
forever.
▪ Present value of annuity(P) is the sum of
present values of all the payments to be made
during the entire term of the annuity.
▪ Maturity /Future Value of annuity (F) is the
sum of future values of all the payments to be
made during the entire term of the annuity.
▪ Regular or Periodic payment (R) is an amount
of money for each payment.
▪ Rate (r) is annual rate, usually in percent,
charged by the lender, or rate of increase of the
investment.
▪ Term of annuity (t) is the amount of time
between the first payment interval and last
payment interval;
▪ Interest rate (j) is the rate of interest in a specific
period of time
▪ Equivalent rate -two annual rates with different
conversion periods that will earn the same
maturity value
▪ Effective rate i(1) - rate when compounded
annually will give the same compound each year
with the nominal rate
▪ Nominal rate - annual interest rate that may be
compounded more than once a year
▪ Number of payments (n) is the length of time
between the origin and maturity dates.
▪ Cash value (Cash price) is the amount of money
equal to the down payment plus the present value
 ANNUITY

TYPES

ANNUITY ANNUITY
CERTAIN UNCERTAIN

KINDS

SIMPLE GENERAL
ANNUITY ANNUITY
CLASSIFICATION CLASSIFICATION

GENERAL GENERAL
ORDINARY ANNUITY DEFERRED
ORDINARY ANNUITY PERPETUITIES
ANNUITY DUE ANNUITY
ANNUITY DUE

•
Simple Annuity is an annuity where the
payment interval is the same as the
interest period.

Example 1: Mr. Alarcon would like to

save ₱ 5,000.00 every month for six
months in a bank that gives 10%
compounded monthly.
Example 2:
A deposit of ₱ 5,500.00 was made at the
end of every three months to an account
that earns 5.6% interest compounded
quarterly.

Payment Interval: Every three months

Compounding Period: Compounded
Quarterly (every three months)
Example 3: Robert borrowed ₱ 50,00.00.
He agrees to pay the principal plus
interest by paying an equal amount of
money each year for 4 years. The interest
is 8% compounded annually.

Payment Interval: Every year

Compounding Period: Compounded
Annually (every year)

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

Example 1: Sarah saves ₱ 6,000.00

monthly in a bank for 6 months’ time,
that pays 8% compounded quarterly.
 Example 2: Payments are made at the
end of each month for a loan that
charges 1.05% interest compounded
semi-annually.

Payment Interval: Every Month

Compounding Period: Compounded
Semiannually

•
Example 3: An investment of ₱ 100,000.00
is used to make payments of ₱ 10,000.00 at
the end of each year and the interest is 7%
compounded semi-annually.

Payment Interval: Every Year (Once a year)

Compounding Period: Compounded
Semiannually (twice a year)
Determine the payment interval and compounding period of the
following problems. Then distinguish whether the problem involves
simple annuity or general annuity.
1. Daniel is saving for his college graduation. He decided to save ₱
500.00 at the end of each month. The bank pays 0.25%
compounded monthly. He will do this for 5 years.
2. A ₱ 50,000.00 loan is payable in 3 years. To repay the loan, the
debtor must pay an amount every 6 months with an interest rate of
6% compounded semi-annually.
3. Vanessa intends to borrow money as capital for her business. To
pay if off, she will pay ₱ 4,000.00 at the end of every month for 6
years. The money is compounded by 5% quarterly.
4. A loan of ₱ 100,000.00 is to be repaid with quarterly installments at
end quarter for five years. The rate of interest charged on the loan
is 10% compounded semi-annually.
5. John started to deposit ₱5,000.00 quarterly in a fund that pays 2%
compounded quarterly. What kind of annuity does the problem
illustrate
An annuity is a sequence of
payments made at equal
(fixed) intervals. It may
be classified in different ways

•
Steps in Solving Problems Involving
Annuities
1. What is/are given? (Identify the given data
in the problem.)
2. What is asked? (Determine what the
problem requires you to do.)
3. What is the appropriate formula to be used?
(Determine the formula to be used.)
4. What is/are the solution/s to the problem?
(Determine the solution/s of the given
problem.)
5. What is your final answer to the problem?
(Determine the final answer of the problem.)
•
Equivalent Rates
Example 1:
Mr. Acer would like to buy a car
payable monthly for 5 years
starting at the end of the month.
How much is the actual cost of
the car if the monthly payment is
18,500 and interest is 6% interest
compounded monthly?
What is/are given? R=18,500; j=6%/12=.005
compounded annually;
n=60 mos
What is asked?) Future Value
What is the 1−(1+𝑗)−𝑛
P= 𝑅
appropriate 𝑗
formula to be used
1− 1+.005 −60
What is/are the
P= 18,500
solution/s to the .06/12
problem?)
What is your final P=956,820
answer
• to the
problem
Example:
1. Mrs. Baler buys a sala set at an Appliance
Center payable for 6 months. How much is
the cost of the sala set if the monthly payment
is ₱ 5,500 at 9% compounded monthly?
Example:
1. Mrs. Baler buys a sala set at an Appliance
Center payable for 6 months. How much is
the cost of the sala set if the monthly payment
is ₱ 5,500 at 9% compounded monthly?
Example 3:
Mr. Roman aims to have his savings grow to Php 2
000 000.00 in 5 years. How much should be his
monthly deposit in an account that pays 6% interest
rate compounded monthly?
Example 4:
Warren saves P1,000 monthly in a bank at 6%
compounded quarterly. How much money will he have
in the bank after 15 years?
4. Mr. David Mathew wants to have PhP 3 000
000 in his fund for 4 years with an interest rate
of 7 % compounded annually. How much
should he invest quarterly?

5. Dominic has been offered of two

investments. The first will give him P200,000
every year for five years at 8% compounded
annually. The second
investment offers P15,000 per month for 5
years with same interest rate. Which
investment is the better one?
OTHER FORMULA FOR ANNUITIES