ANNUITY AND PERPETUITY

I. ANNUITY

Discussion

1) Annuity – a series of equal payments or investments made at regular intervals of time.

2) Types of Annuity:
a) Ordinary Annuity – one where equal payments are made at the end of each payment
period, starting from the first period.

TYPE OF VALUE FORMULA VARIABLE

P = Present Value
A = Payment Amount
𝟏 − (𝟏 + 𝒊)−𝒏
Present Value 𝑷 = 𝑨[ ] n = Number of Periods, where
𝒊 𝒏 = 𝒎𝒕
𝒓
i = Interest Rate, where 𝒊 =
𝒏
F = Future Value
A = Payment Amount
(𝟏 + 𝒊)𝒏 − 𝟏
Future Value 𝑭 = 𝑨[ ] n = Number of Periods, where
𝒊 𝒏 = 𝒎𝒕
𝒓
i = Interest Rate, where 𝒊 =
𝒏

b) Deferred Annuity – one where the payment of the first amount is deferred by a certain
number of periods after the first.

TYPE OF VALUE FORMULA VARIABLE

𝟏−(𝟏+𝒊)−𝒏 P = Present Value
𝑴 = 𝑨[ ], where M is the
𝒊 A = Payment Amount
Present Value of Ordinary
n = Number of Periods, where
Annuity
𝒏 = 𝒎𝒕
𝒓
Present Value 𝑷 = 𝑴(𝟏 + 𝒊)−𝒌 i = Interest Rate, where 𝒊 =
𝒏

𝟏 − (𝟏 + 𝒊)−𝒏
𝑷 = 𝑨[ ] (𝟏 + 𝒊)−𝒌 k = Deferral Period
𝒊

F = Future Value
𝒏 A = Payment Amount
(𝟏 + 𝒊) − 𝟏
Future Value 𝑭 = 𝑨[ ] n = Number of Periods, where
𝒊 𝒏 = 𝒎𝒕
𝒓
i = Interest Rate, where 𝒊 =
𝒏
 c) Annuity Due – one where the payments are made at the start of each period, beginning
from the first period.

TYPE OF VALUE FORMULA VARIABLE

P = Present Value
A = Payment Amount
𝟏 − (𝟏 + 𝒊)−𝒏
Present Value 𝑷 = 𝑨[ ] (𝟏 + 𝒊) n = Number of Periods, where
𝒊 𝒏 = 𝒎𝒕
𝒓
i = Interest Rate, where 𝒊 =
𝒏
F = Future Value
A = Payment Amount
(𝟏 + 𝒊)𝒏 − 𝟏
Future Value 𝑭 = 𝑨[ ] (𝟏 + 𝒊) n = Number of Periods, where
𝒊 𝒏 = 𝒎𝒕
𝒓
i = Interest Rate, where 𝒊 =
𝒏

II. PERPETUITY

Discussion

1) Perpetuity – annuity where the payment periods extend forever, or in which the periodic
payments continue indefinitely.

𝑨
𝑷=
𝒊

Examples

1) An investor deposits P1,000 per year in a bank, which offers an interest of 1.8% per annum for
time deposits of over 5 years. Compute how much the investor can collect at the end of 13 years,
assuming that he never withdraws any amount before the 13th year.
2) Find the present value of an ordinary annuity which has deposits of $10,279 semi-annually for 5
years at 7.6% compounded semi-annually.
3) Suppose you want to save money for your child’s college expenses. You deposit $1,000 at the
beginning of each year for 18 years, at an interest rate of 5%. How much is available for your
child when he or she starts school?
4) Suppose for an annuity due, you want to have $30,000 in the bank after 20 years. Assuming you
make deposits at the beginning of each year at an interest rate of 4%, how much would you have
to deposit at the start of each year, assuming that each deposit is the same amount?
5) The buyer of a certain machine has the following options:

Option 1: Pay P2,000 cash and P2,000 annually for the next 6 years.

Option 2: Pay P3,500 cash and P2,000 annually for the next 5 years.

If money is worth 12% compounded annually, which method of payment is better for the buyer?

6) If you are going to receive $50,000 for 15 years starting 6 years from now, what is the present
value of the cash flows discounted at 8%?
7) A certain value of a 10-year annuity pays $300 a year at the end of each year. If the first payment
is made 6.25 years from now at 10% interest compounded quarterly, what is the present value?
8) What is the present value of the Big Lottery’s payments if it will pay out $1,000,000 per year
forever, with the first payment in 3 years, and at a discount rate of 4%?
9) What is the present value of the Little Lottery’s payments if it will pay out equal annual
installments of $10,000, with the first payment in the 5th year and the last payment in the 9th year?
Assume the discount rate to be at 5%.
10) A deferred annuity is purchased that will pay $10,000 per quarter for 15 years after being
deferred for 5 years. If money is worth 6% compounded quarterly, what is the present value of
this annuity?
11) A t-year annuity amounted to $16,000, with equal payments of $5,000. If the interest rate is at 8%
compounded quarterly, and the rate of deferral is 2 years, calculate the total time period of this
annuity.
12) A certain amount was invested on January 1, 2010, such that it generated a periodic payment of
$1,000 at the beginning of each month of the calendar year 2010. The interest rate on the
investment was 13.2% compounded monthly. Calculate the original investment and the interest
earned.