Scribd
Upload
272 views23 pages

Gen Math Q2 - Week 3 - Simple Annuity

Uploaded by

Francisco, Ashley Dominique V.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
272 views23 pages

Gen Math Q2 - Week 3 - Simple Annuity

Uploaded by

Francisco, Ashley Dominique V.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 23

ANNUITIES

Lesson: Simple Annuity


ANNUITY

• Payment by installment are


done periodically and in equal
amounts.
• This payment scheme is called
annuity
Basic Annuities
An annuity is a series of equal periodic payments.
A fixed sum of money paid to someone at a regular
intervals, subject to a fixed compound interest rate
ANNUITY
Annuities can be Classified in Different Ways
ANNUITIES
According to Simple Annuity General Annuity
payment interval An annuity where the payment An annuity where the payment
and interest period interval is the same as the interest interval is not the same as the interest
period period

According to the Ordinary Annuity or Annuity Annuity Due


time of payment Immediate A type of annuity in which the
A type of annuity in which the payments are made at the beginning
payments are made at the end of each of each payment interval
payment interval

According to Annuity Certain Contingent Annuity


duration An annuity in which payments begin An annuity in which the payments
and end at definite times or fixed extends over an indefinite length of
date time
Slide 6

Classifications of Simple Annuity


1. Ordinary Annuity
– In ordinary annuity, the equal payments are
made at the end of each compounding period
starting from the first compounding period.

From the cash flow diagram shown above, the future amount F is the sum of payments starting
from the end of the first period to the end of the nth period. Observe that the total number of
payments is n and the total number of compounding periods is also n. Thus, in ordinary annuity,
the number of payments and the number of compounding periods are equal.
6-6
Slide 7

Classifications of Simple Annuity


2. Annuity Due
– In annuity due, the equal payments are made
at the beginning of each compounding period
starting from the first period. The diagram
below shows the cash flow in annuity due.

As indicated in the figure above, F1 is the sum of ordinary annuity of n payments. The future
amount F of annuity due at the end of nth period is one compounding period away from F 1. In
symbol, F = F1(1 + i).
6-7
Classifications of Simple Annuity
Slide 8

3. Deferred Annuity
– In deferred annuity the first payment is
deferred a certain number of compounding
periods after the first. In the diagram
below, the first payment was made at the
end of the kth period and n number of
payments was made. The n payments form an
ordinary annuity as indicated in the figure.

6-8
Classifications of Simple Annuity
Slide 9

4. Perpetuities
– Perpetuity is an annuity where the payment
period extends forever, which means that the
periodic payments continue indefinitely.

6-9
Lesson

SIMPLE ANNUITY

McGraw-Hill /Irwin © 2009 The McGraw-Hill Companies, Inc.


Slide 11

Ordinary Annuity
An annuity with payments at the end of the
period is known as an ordinary annuity.

Today 1 2 3 4

₱10,000 ₱10,000 ₱10,000 ₱10,000


End of year 1
End of year 2

End of year 3
End of year 4

6-11
Annuity – a sequence of payments made at equal (fixed)
intervals or periods of time

Payment interval – the time between successive payments

Term of an annuity, t – time between the first payment


interval and last payment interval
Definition
Regular or Periodic payment, R – the amount of each
of Terms payment

Amount (Future Value) of an annuity, F – sum of future


values of all the payments to be made during the entire
term of the annuity

Present Value of an annuity, P – sum of present values of


all the payments to be made during the entire term of the
annuity
EXAMPLE 1: Suppose Mr. Ramos
would like to save P3,000 at the end of
each month, for six months, in a fund
that gives 9% compounded monthly.
How much is the amount or future
value of her savings after 6 months?
SIMPLE ORDINARY ANNUITY
SIMPLE ORDINARY ANNUITY
EXAMPLE 1: Suppose Mr. Ramos would like to save P3,000 at the end of
each month, for six months, in a fund that gives 9% compounded monthly.
How much is the amount or future value of her savings after 6 months?

  Given:   Solution:
periodic payment R = P3,000
term t = 6 months
interest rate per annum = 0.09
number of conversions per year m = 12
interest rate per period 0.0075

Find:
amount (future value) at the end of the term, F
SIMPLE ORDINARY ANNUITY
EXAMPLE 2: In order to save for her high school graduation, Marie decided
to save P2000 at the end of each month. If the bank pays 0.25% compounded
monthly, how much will her money be at the end of 6 years?

  Given:   Solution:
R = 2000
m = 12
= 0.25% = 0.0025
j = = 0.000208333
t = 6 years
n = mt = (12)(6)= 72 periods

Find:
amount (future value) at the end of the
term, F
EXAMPLE: Suppose Mr. Ramos
would like to know the present value
of her monthly deposit of P3,000
when interest is 9% compounded
monthly. How much is the present
value of her savings after 6 months?
SIMPLE ORDINARY ANNUITY
SIMPLE ORDINARY ANNUITY
EXAMPLE 1: Suppose Mr. Ramos would like to know the present value of
her monthly deposit of P3,000 when interest is 9% compounded monthly.
How much is the present value of her savings after 6 months?

  Given:   Solution:
periodic payment R = P3,000
term t = 6 months
interest rate per annum = 0.09
number of conversions per year m = 12
interest rate per period 0.0075

Find: Present value, P


SIMPLE ORDINARY ANNUITY
EXAMPLE 2: Mr. Ramos paid P200,000 as down payment for a car. The
remaining amount is to be settled by paying P16,200 at the end of each month
for 5 years. If interest is 10.5% compounded monthly, what is the cash price
of his car?
  Solution:
  Given:
down payment, DP = 200,000
periodic payment, R = P16,200
term, t = 5 years
interest rate per annum, = 0.105
number of conversions per year, m = 12
interest rate per period, 0.00875
n = mt = (12)(5)= 60 periods
Cash Value = DP + P
Find: Cash Value or Cash Price = 200,000+
Cash Value = P953,702.20
SIMPLE
ORDINARY
ANNUITY
SIMPLE ORDINARY ANNUITY
EXAMPLE: A certain fund currently has P100,000 and is invested at 3%
interest compounded annually. How much withdrawal can be made at the end
of each year so that the fund will have zero balance at the end of 12 years?

  Solution:
  Given:
present value, P = P100,000
term t = 12 years
interest rate per annum = 0.03
number of conversions per year m = 1
interest rate per period 0.03
n = mt = (1)(12)= 12 periods

Find: Periodic payment, R


END OF
PRESENTATION
THANK YOU FOR LISTENING!!!

You might also like