Lesson : Exploring Deferred Annuity

Deferred Annuity

Is an annuity whose term does not begin until the expiration of a specified time.
This means that the first payment is not made on the first interest but on the later period.

To say that an annuity is deferred for a certain time means that the term of an annuity
commences at the end of this time.

Period of Deferment

Is the length of time for which there is no payment.

TERMS TO REMEMBER ABOUT SOLVING DEFERRED ANNUITY

A –actual value

n – interest period (m)(t)

h – deferred period (m)(t – stands for the first payment due) -1

R – periodic payment
𝒓
i – interest rate
𝒎

m – frequency of conversion period

t – number of years

S – Imaginary Value

Formulas To be Use

a. To obtain the present value of all payments, imaginary and actual, minus the
present value of the imaginary payments :

A=R [ ( 1 + i)−(𝒉+𝒏)
i ] [ –R
1 - (1 + I )−𝒉
i ]
 Example:

If money is worth 5% compounded semi- annually, find the present value of a sequence of
12 semi - annual payments of Php 500 each, the first of which is due at the end of 4 ¼
years.

Step 1. Identify the given information.

R= 500 r= 5%

m= 2 n= 12

h= 8 is obtained by : (2) (4 ¼ or 4.25) – 1 = 7.5 or 8

5
i= 0.025 is obtained by: = 2.5 (move two decimal places to the right) so 0.025
2

Step 2. Compute the present value A using the formula andcompare your answer if this was it,

4, 209.51

b. To obtain the amount of annuity where the first is deferred, the formula is:

S=R [ ( 1 + i)(𝒉+𝒏) − 𝟏
i ] [ –R
-1
1- (1+i )𝒉 − 𝟏
i ]
c. To solve for the the periodic payment R of a deferred annuity, we may substitute
the given to the above stated formula or to the derived formulas as follows:

𝑨𝒊 𝑺𝒊
𝑹= 𝑹=
(𝟏+𝒊)−𝒉 −(𝟏+𝒊)−(𝒉+𝒏) (𝟏+𝒊)𝒉+𝒏 − (𝟏+𝒊)𝒉+
Example:

To settle a debt of Php 30 000, Mr. San Juan will pay quarterly for 6 years at 12%
compounded quarterly. If the first payment is due at the end of 1 year, How much is his
quarterly payment ?

Step 1. Identify the given information.

A = 30 000 i = 0.03 n= 24

t = 6 years r = 12%

h=3 m=4

Step 2. Compute the periodic payment R using the given formula and compare if we have the
same solution which is 1 935.90

Try to solve :
Find the present value and the amount of 10 semi – annual payments of Php 750 each
if the first payment is done at 3 years and money is worth 10% compounded semi –
annually

Step 1. Identify the given information

Step 2. Since you are tasked to find the present value A and the amount of 10 semi
annual payments, try to solve for A first

Step 3. Compute of 10 semi – annual payments using the formula of Finding S

Then try to compare our provided answers:

A = 3 247.11

S= 12 039.70