ANNUITIES

• Introduction
• Future & Present Value of Ordinary Annuity
Certain
• Amortization
• Sinking Fund
• Annuity with Continuous Compounding
5.0 INTRODUCTION
Annuity – Definition
Annuity is a series of (usually) equal payments
made at (usually) equal intervals of time.
Examples of annuity:
Shop rentals
Insurance policy premium
Regular deposits to saving accounts
Installment payments
5.0 INTRODUCTION
Annuity – Classes
Annuity can be classified into many classes:
Annuity certain – payment are made at the
end of each payment period.
Annuity due – payment are made at the
beginning of each period.
General annuity
Perpetuity & others.
In this chapter we shall mainly discuss ordinary
annuity certain where payment are made at
the end of each payment periods & the interest
and payment periods are of the same interval.
5.1 FUTURE & PRESENT VALUES
ORDINARY ANNUITY CERTAIN
Future Value of Ordinary Annuity Certain
The formula to calculate the future value of the
annuity at the end of investment periods is
given by n  mt
 1  i   1
n
The sum of
all future
S  R 
values of the  i  i
r
periodic m
payments
where : R = Periodic payment
i = Interest rate per interest period
n = Term of investment
5.1 FUTURE & PRESENT VALUES
ORDINARY ANNUITY CERTAIN
Future Value of Ordinary Annuity Certain
 1  i n  1
S  R   Rs 
 i  ni

The expressions, sn i is the future value of

annuity of 1 per payment for n intervals. Its
read as “s angle n at i ” & its value can be
found for certain i and n in the tables.
EXAMPLE 1
1. P100 is deposited every month for 2 years 7 months at
12% compounded monthly. What is the futures value
of this annuity at the end of the investment?

Solution
R  100  1  0.0131  1
S  100  
r  12 %; m  12;
 0 . 01 
7 31
t 2   P3 613 .27
12 12
12 %
i  1%
12
 31 
n  12   31
 12 
EXAMPLE 1
2. P100 is deposited every 3 months for 2 years 9 months
at 8% compounded quarterly. What is the futures value
of this annuity at the end of the investment?

Solution
R  100
r  8%; m  4;
9 33
t 2 
12 12
8%
i  2%
4
 33 
n  4   11
 12 
EXAMPLE 1
3. Find the amount to be invested every 3 months at 10%
compounded quarterly to accumulate P10,000 in 3
years.

Solution
S  10 000
r  10 %; m  4;
t 3
10 %
i  2.5%
4
n  43   12
EXAMPLE 1
4. P100 was invested every month in an account that
pays 12% compounded monthly for two years. After
the two years, no more deposits was made. Calculate
the amount of the account at the end of five years.
M: 0
12% monthly M: 24 No deposit M: 60

Solution 100

R  100 Amount in the account just after 2 years:

r  12 %; m  12;  1  0.0124  1
S 2  100  
t1  2; t2  3  0 .01 
12 %  P 2 697 .35
i  1%
12 Amount in the account at the end
n1  12 2  24 of 5 years: S  2 697 .351  0.0136
5
n2  12 3   36  P3 859 .28
EXAMPLE 1
5. Julia invested P100 every month for 5 years in an
investment scheme. She was offered 5% compounded
monthly for the first 3 years & 9% compounded
monthly for the rest of the period. Determine the
accumulated amount at the end of 5 years.
M: 0 M: 36 M: 60
5% monthly 9% monthly
Solution
100 100 100
R  100; m  12
r1  5%; r2  9%;
Amount of annuity just after 3rd years:
t1  3; t2  2
5% 9%  1  512% 36  1
i1  ; i2   0.75 % S 3  100  
12 12  
5%

n1  123   36
12

 P3 875 .33
n2  122  24
EXAMPLE 1
M: 0 M: 36 M: 60
5% monthly 9% monthly
Solution
100 100 100

R  100; m  12
r1  5%; r2  9%; Amount of annuity at the end of 5 years:

t1  3; t2  2 S5  3 875 .331  0.75% 

24

i1 
5%
; i2 
9%
 0.75 %
 P 4 636 .50
12 12
n1  123   36 Amount of annuity for another the 2 years:
n2  122  24  1  0.75% 24  1
S 2  100  
 0 . 75 % 
Total amount at the end of 5 years  P 2 618 .85
= P4636.50 + P2618.85 = P7255.35
5.1 FUTURE & PRESENT VALUES
ORDINARY ANNUITY CERTAIN
Present Value of Ordinary Annuity Certain
The formula to calculate the present value of the
annuity at the end of investment periods is
given by n  mt
1  1  i 
n

The sum of
all present
A  R 
values of the  i  i
r
periodic m
payments
where : R = Periodic payment
i = Interest rate per interest period
n = Term of investment
EXAMPLE 2
1. Lisa has to pay P300 every month for 24 months to
settle a loan at 12% compounded monthly.
a) What is the original value of the loan?
b) What is the total interest that she has to pay?
Solution
R  300 1  1  0.0124 
r  12 %; m  12;
a) A  300  
 0 . 01 
t 2
 P 6 373 .02
12 %
i
12
 1% b) I  30024   6 373.02
n  122  24  P826.98
EXAMPLE 2
2. Johan won an annuity that pays P1000 every 3
months for 3 years. What is the present value of this
annuity if the money worth 16% compounded
quarterly?
Solution
R  1000 1  1  0.04 12 
r  16 %; m  4; A  1000  
 0.04 
t 3
 P9 385 .07
16 %
i  4%
4
n  43   12
EXAMPLE 2
3. Mimi intends to give scholarship worth P7500 every
year for 6 years. How much must she deposit now into
an account that pays 7% per annum to provide this
scholarship?
Solution
R  7500
r  7%; m  1;
t 6
7%
i  7%
1
n  16   6
EXAMPLE 2
4. Maria invests P12 000 in an account that pays 6%
compounded monthly. She intends to withdraw her
account every month for 2 years and when she makes
her last withdrawal her account will zero. Determine
the size of these withdrawal.
Solution
A  12 000
r  6%; m  12;
t 2
6%
i  0 .5 %
12
n  122  24
EXAMPLE 2
5. Mang Tonying borrowed P80 000 at 12% compounded monthly
for 3 years.
a) Calculate his monthly payment.
b) If he has not paid his first 5 monthly payments, how much
should he pay on his 6th payment to settle all outstanding
arrears?
c) If immediately after paying the first 5 monthly payments, he
wants to settle all the loan. How much additional payments
does he has to make?
d) If he has made the first 5 monthly payments & wants to
settle all the loan in the sixth payment, how much should
he has to pay? How much interest was paid?
A  80 000 1  1  i  n 
Solution r  12 %; m  12; t 3 a) A  R  
 i 
 1%; n  123  36
12 %
i
12
EXAMPLE 2
A  80 000
Solution r  12 %; m  12; t 3

 1%; n  123   36
12 %
i 
12
b) Outstanding arrears (5 months), S =

c) Outstanding loan (after 5 months) A =

d) 6th payment (used answer in c) as P), S = P(1+i)n

Total interest paid = R(5) + 6th payment – A

PRACTICE 1
1. Find the future values and the present values of the
following annuities:
a) P6000 every year for 8 years at 12% compounded
annually.
b) P800 every month for 2 years 5 months at 5%
compounded monthly.
c) P950 every 3 months for 3 years 9 months at 6%
compounded quarterly.
2. Serena invested P300 every three months for four
years. She was offered 5% compounded quarterly for
the first two years and 8% compounded quarterly for
the rest of the period. Find the accumulated amount
at the end of four years.
PRACTICE 1
3. P500 was invested every month for twenty months in an
account that pays 5% compounded annually. After the
twenty months, no more deposit was made. Find the
amount in the account at the end of four years.
4. Find the amount that must be deposited at the end of
each month at 5.5% compounded monthly for two years
so as to accumulate P2000.
5. Mariana borrowed P100 000 at 4% compounded
monthly. She has to repay the loan by making 60
monthly payments.
a) Find her monthly payments.
b) If she has not paid her first 15 monthly payments,
how much should she pay on her 16th payment to
settle all outstanding arrears?