Chapter 5

Simple
Annuity Due
Presented by: Nicole Andrea Mae L. Lecaros
Learning Competencies

After completing this chapter, the learner will be able to:

o Define the key terms of a simple annuity due,
o Distinguished and differentiated simple annuity due with an ordinary
simple annuity.
o Compute for future value, present value, payment size, and term of
the annuity due.
o Derive the formulas of a simple annuity due.
o Give examples of a simple annuity due problem in real life situation.
 Chapter Outline

Unit 5.1: Introduction to Simple Annuity Due

Unit 5.2: Computing the Future Value of a Simple Annuity Due

Unit 5.3: Computing the Present Value of a Simple Annuity Due

Unit 5.4: Computing the Periodic Payment of a Simple Annuity Due

Unit 5.5: Computing the Term of a Simple Annuity Due

Unit 5.1: Introduction to Simple Annuity Due

Annuity due Simple annuity

A type of annuity in which Compounding intervals
the payments are made at is equal or the same as
beginning of each payment the payment interval.
interval.
 Time Diagram for an Annuity Due
0 1 2 3 4 n-2 n-1 n Interval number

R R R R R R R R Payment Size

Focal date for the Focal date for the

Present Value Future Value

Note that;
Focal Date is the date selected for the calculation of equivalent
values.
The following variables are used in the treatment of annuity due:

𝑆 𝑑𝑢𝑒 = Future value n-payment simple annuity due

𝐴 𝑑𝑢𝑒 = Present value n-payment simple annuity due
𝑅 = Size of each annuity payment
𝑗 = Nominal interest rate
𝑚 = Number of conversions per year
𝑡 = Time period (term) of the loan or investment
𝑛 = Number of payments in the annuity
𝑖 = Interest rate per compounding period (which, for simple annuities, equals the interest
rate per payment interval)
 Comparison between Ordinary Annuity and Annuity Due
Basis Ordinary Annuity Annuity Due

Payment Schedule Payments are required at Payments are required at

the end of each period. the beginning of each
period.
Present Value Lower present value than Higher present value than
annuity due. an ordinary annuity.
Amount Payment is bigger as it Payment is comparatively
includes interest for the smaller.
period.
Appropriate Beneficial if one has to Beneficial if one has to
make the payment. receive payments.
Examples Mortgage payments Insurance premiums
Simple Annuity Due Formula:

𝑆 𝑑𝑢𝑒 = 𝑅 [
(1+ 𝑖)𝑛 +1 − 1
𝑖
−1 ]
[
𝑙𝑜𝑔 1+
( 𝑆 𝑑𝑢𝑒 + 𝑅 ) 𝑖
𝑅 ]
[ ]
1 −𝑛
1− (1+ 𝑖) 𝑛=
log ⁡( 1+ 𝑖)
−1
𝐴 𝑑𝑢𝑒 = 𝑅 +𝑛
𝑖

[ ]
𝑖
𝑆𝑑𝑢𝑒 ( 𝐴 𝑑𝑢𝑒 − 𝑅 ) 𝑖
𝑅= 𝑙𝑜𝑔 1−
(1+𝑖)
𝑛 +1
− (1+𝑖) 𝑅
𝑛=
log ⁡(1+ 𝑖)
𝑖
𝐴 𝑑𝑢𝑒
𝑅= 1 −𝑛
(1+ 𝐼 )− (1+𝑖)
 Unit 5.2: Computing the Future Value of a Simple Annuity
Due
The formula for the may easily derive from the formula for the future value of an ordinary
simple annuity () by using the insight gained from Figure 5.2. As shown in figure n annuity
payments of size R is shown along every two timelines. In the first part of Figure 5.2, the
payments are sighted as an annuity due. Its future value is at a focal date one payment interval
after the last payment. In the second part of Figure 5.2, the payments are sighted as an
ordinary annuity. Its future value coincides with the date of the last payment.
 Each of these future values ( and ) is a single amount that is equivalent to the
annuity at the respective focal date. Both and are equivalent to each other, allowing for
the time interval between them. Therefore, one compounding period later, and we can
denote it as
Derivation of the Future Value Formula
Taking the principle established above, we can derive the formula of the future
value of an annuity due, the mathematical manipulation is shown below.
𝑆 𝑑𝑢𝑒 =𝑆𝑛 (1+𝑖)
Represent in terms of

𝑆 𝑑𝑢𝑒 = 𝑅 [ ( 1+𝑖 )𝑛 − 1
𝑖 ](1+ 𝑖) Substitute equivalent formula of

𝑆 𝑑𝑢𝑒 = 𝑅 [ (1+ 𝑖)𝑛 +1 −(1+ 𝑖)

𝑖 ] Distribute

𝑆 𝑑𝑢𝑒 =𝑅 [
(1+ 𝑖)𝑛 +1 −1− 𝑖
𝑖 ] Distribute -1

𝑆 𝑑𝑢𝑒 =[(1+𝑖)𝑛 +1 − 1 𝑖
𝑖
−
𝑖 ] Apply partial fraction

𝑆 𝑑𝑢𝑒 =𝑅 [ (1+ 𝑖)𝑛 +1 −1

𝑖
−1 ] Simplify
Example 1: How much will Gabrielle accumulate in her insurance
policy by age 60 if the first semiannual contribution of ₱10,000 is
made on her 28th birthday and the last is made six months before
her birthday? Assume that her insurance policy earns 11%
compound semiannually.
Figure 5.3 illustrates the semiannual payment from the 28th birthday until the age of 60.
Example 2: Sostenes made deposits of ₱900 at the beginning of
each month to WSS Cooperative, which pays 12% compounded
monthly. After 4years. Sostenes makes no more deposits. What
will be the balance in the account 7 years after the last deposit?

𝑆 𝑑𝑢𝑒 =𝑅[(1+ 𝑖)𝑛 +1 −1

𝑖
−1 ] 𝑛
𝐹 = 𝑃 (1+𝑖)
 Unit 5.3: Computing the Present Value of a Simple Annuity
Due

Each of these present values ( and ) is a single amount that is equivalent to the annuity at the
respective focal date. Both and are equivalent to each other, allowing for the time interval
between them. Therefore, will equal the one compounding period later, and we can denote it
as
A. Derivation of the Present Value Formula
Taking the principle established above, we can derive the formula of the
present value of an annuity due, the mathematical manipulation is shown below. Then,
we will apply the derived formula in the preceding examples.
Example 1: Sheila’s Furniture is advertising a lazy Boy Chair for ₱5,000 down
monthly payments of ₱5,000, including interest at 18% compounded monthly. What
is the cash price of the chair?

𝐴 𝑑𝑢𝑒 = 𝑅 [
1−(1+ 𝑖)1 −𝑛
𝑖
+1 ]
 Unit 5.4: Computing the Periodic Payment of a Simple
Annuity Due

A. Derivation of the Periodic Payment based on the Future Value Formula

The formula for the periodic payment can be derived using the formula.
The mathematical derivation is shown below.
Example 2: Wilfredo has already accumulated ₱2.3 million in his retirement plan. His goal is to
build it to ₱6 million with an equal contribution over a six-month period for the next eight years.
If his retirement plan earns 10% compounded semiannually, what must be the size of further
contributions?

Solution:
The ₱6 million retirement plan target is the combined future value of the ₱2.3 million already in
the retirement plan and the annuity due formed by the next 16 payments (n=16). That is,
B. Derivation of the Periodic Payment based on the Present Value Formula
The formula for the periodic payment can be derived using the formula.
The mathematical derivation is shown below.
Unit 5.5: Computing the Term of a Simple Annuity Due

A. Derivation of the Term based

on the Future Value Formula
The formula for the term of
an annuity can be derived using the
formula.
The mathematical derivation is shown
below.
B. Derivation of the Term based on the Present Value Formula
The formula for the term of an annuity can be derived using the formula.
The mathematical derivation is shown below.
Thank you!!