CHAPTER 5 :

ANNUITY
5.0 Introduction
5.1 Future & Present Value of Ordinary
Annuity Certain
5.2 Amortization
5.3 Sinking Fund
5.4 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
Future Value of
Ordinary Annuity
ANNUITY
CERTAIN
Certain
The formula to calculate the future value
of the annuity at the end of investment
periods is given by n
nn mt
mt

The
Thesum
sumof
of
all
allfuture
future
values
valuesof
of
the
theperiodic
periodic
payments
payments

11 ii n 11
SS R

R
ii

where :

r
ii r
m
m

R = Periodic payment
i = Interest rate per interest

period
n = Term of investment

5.1 FUTURE & PRESENT

VALUES ORDINARY
Future Value of
Ordinary Annuity
ANNUITY
CERTAIN
Certain
nn
11 ii 11
SS R
Rs
R
Rs
nni i
ii


s

The expressions,n 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. RM 100 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
r 12%;

m 12;

7 31

12 12
12%
i
1%
12
31
n 12
31
12

t 2

1 0.01 31 1
S 100

0
.
01

RM 3 613.27

EXAMPLE 1
2. RM 100 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%;
9 33

12 12
8%
i
2%
4
33
n 4
11
12

t 2

m 4;

EXAMPLE 1
3. Find the amount to be invested every 3 months at 10%
compounded quarterly to accumulate RM 10,000 in 3
years.
Solution
S 10 000
r 10%;

m 4;

t 3
10%
2. 5%
4
n 4 3 12
i

EXAMPLE 1
4. RM 100 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

Solution

12%
monthly

r 12%;

m 12;

t1 2;

t2 3

12%
1%
12
n1 12 2 24

n2 12 3 36

No deposit

M: 60

100

R 100

M:
24

Amount in the account just after 2 years:

1 0.01 24 1
S2 100

0
.
01

RM 2 697.35
Amount in the account at the end
of 5 years: S 2 697.351 0.01 36
5

RM 3 859.28

EXAMPLE 1

5. Julia invested RM 100 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.
Solution

M:
0

5% monthly M:
36
100

R 100;

m 12

r1 5%;

r2 9%;

t1 3;

t2 2

5%
9%
i1
;
i2
0.75%
12
12
n1 12 3 36
n2 12 2 24

M: 60

9% monthly

100

100

Amount of annuity just after 3rd years:

S3 100

5% 36
12
5%
12

RM 3 875.33

EXAMPLE 1
Solution

M:
0

5% monthly M:
36
100

R 100;

m 12

r1 5%;

r2 9%;

t1 3;

t2 2

9% monthly

100

M: 60
100

Amount of annuity at the end of 5 years:

S5 3 875.331 0.75%

24

5%
9%
RM 4 636.50
;
i2
0.75%
12
12
Amount of annuity for another the 2 years:
n1 12 3 36
i1

n2 12 2 24

Total
Totalamount
amountat
atthe
theend
endof
of55years
years

1 0.75% 24 1
S2 100

0
.
75
%

RM 2 618.85

==RM
RM4636.50
4636.50++RM
RM2618.85
2618.85==RM
RM7255.35
7255.35

5.1 FUTURE & PRESENT

VALUES ORDINARY
Present ValueCERTAIN
of Ordinary Annuity
ANNUITY

Certain
The formula to calculate the present value
of the annuity at the end of investment
periods is given by
nn mt
mt
n

The
Thesum
sumof
of
all
allpresent
present
values
valuesof
of
the
theperiodic
periodic
payments
payments

1111 ii n
AA R

R
ii

where :

r
ii r
m
m

R = Periodic payment
i = Interest rate per interest

period
n = Term of investment

EXAMPLE 2
1. Lisa has to pay RM 300 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
r 12%;
t 2
12%
1%
12
n 12 2 24
i

m 12;

1 1 0.01 24
a) A 300

0
.
01

RM 6 373.02
b) I 300 24 6 373.02
RM 826.98

EXAMPLE 2
2. Johan won an annuity that pays RM1000 every 3
months for 3 years. What is the present value of this
annuity if the money worth 16% compounded
quarterly?
Solution
R 1000
r 16%;
t 3
16%
4%
4
n 4 3 12
i

m 4;

1 1 0.04 12
A 1000

0
.
04

RM 9 385.07

EXAMPLE 2
3. Mimi intends to give scholarship worth RM 7500 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%;
t 6
7%
i
7%
1
n 1 6 6

m 1;

EXAMPLE 2

4. Mariam invests RM 12 000 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.

Firdaus borrowed RM 80 000 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?

Solution

A 80 000
r 12%;
i

m 12;

12%
1%; n 12 3 36
12

t 3

1 1 i n
a) A R

EXAMPLE 2
Solution

A 80 000
r 12%;
m 12;
t 3
12%
i
1%; n 12 3 36
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) RM6000 every year for 8 years at 12%
compounded annually.
b) RM800 every month for 2 years 5 months at
5% compounded monthly.
c) RM950 every 3 months for 3 years 9 months
at 6% compounded quarterly.
2. Serena invested RM300 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. RM500 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 RM2000.
5. Mariana borrowed RM 100 000 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?

5.2 AMORTIZATION
Amortization
Schedule
Its a table showing the distribution

of principal & interest payments for

the various of periodic payments.

EXAMPLE 3
A loan of RM 1000 at 12% compounded monthly is to be
Amortized by 18 monthly payments.
a) Calculate the monthly payment.
b) Construct an amortization schedule.
Solution
A 1000
r 12%;
m 12;
18
t
1 .5
12
12%
i
1%
12
n 121.5 18

1 1 i n
a) A R

1 1 0.01 18
1000 R

0.01

1000 R 16.3983
R RM 60.98

EXAMPLE 3
Solution b) Amortization schedule
Period

Beginning
balance

Ending
balance

Monthly
payment

Total paid

Total principal
paid

Total interest
paid

MYR 1,000.00

MYR 949.02

MYR 60.98

MYR 60.98

MYR 50.98

MYR 10.00

MYR 949.02

MYR 897.53

MYR 60.98

MYR 121.96

MYR 102.47

MYR 19.49

MYR 897.53

MYR 845.52

MYR 60.98

MYR 182.95

MYR 154.48

MYR 28.47

MYR 845.52

MYR 792.99

MYR 60.98

MYR 243.93

MYR 207.01

MYR 36.92

MYR 792.99

MYR 739.94

MYR 60.98

MYR 304.91

MYR 260.06

MYR 44.85

MYR 739.94

MYR 686.36

MYR 60.98

MYR 365.89

MYR 313.64

MYR 52.25

MYR 686.36

MYR 632.24

MYR 60.98

MYR 426.87

MYR 367.76

MYR 59.11

MYR 632.24

MYR 577.58

MYR 60.98

MYR 487.86

MYR 422.42

MYR 65.44

MYR 577.58

MYR 522.37

MYR 60.98

MYR 548.84

MYR 477.63

MYR 71.21

10

MYR 522.37

MYR 466.62

MYR 60.98

MYR 609.82

MYR 533.38

MYR 76.44

11

MYR 466.62

MYR 410.30

MYR 60.98

MYR 670.80

MYR 589.70

MYR 81.10

12

MYR 410.30

MYR 353.42

MYR 60.98

MYR 731.78

MYR 646.58

MYR 85.20

13

MYR 353.42

MYR 295.97

MYR 60.98

MYR 792.77

MYR 704.03

MYR 88.74

14

MYR 295.97

MYR 237.95

MYR 60.98

MYR 853.75

MYR 762.05

MYR 91.70

15

MYR 237.95

MYR 179.35

MYR 60.98

MYR 914.73

MYR 820.65

MYR 94.08

16

MYR 179.35

MYR 120.16

MYR 60.98

MYR 975.71

MYR 879.84

MYR 95.87

17

MYR 120.16

MYR 60.38

MYR 60.98

MYR 1,036.69

MYR 939.62

MYR 97.07

18

MYR 60.38

MYR 0.00

MYR 60.98

MYR 1,097.68

MYR 1,000.00

MYR 97.68

5.3 SINKING FUND

Sinking Fund Definition
Sinking fund is an account that is set
up for a specific purpose at some
future date.
date
For example:
An individual might establish a sinking
fund for the purpose of discharging a debt
at a future date.
A company might establish a sinking fund
in order to accumulate the sufficient
capital to replace equipment that is
expected to obsolete at some future date.

EXAMPLE 4
A debt of RM 1000 bearing interest at 10% compounded
annually is to be discharged by the sinking fund method. If
5 annual deposits are made into a fund which pays 8%
compounded annually,
a) calculate the annual interest payment.
b) Determine the size of the annual deposit into sinking
fund.
c) What is the annual cost of this debt?
d) Construct the sinking fund schedule. a) I RM 1000 10% RM 100
1 i n 1
S 1000;
b) S R

Solution r1 10%;
m 1; t 5
1 0.08 5 1
r2 8%;
m 1; t 5
1000 R
8%
i
8%
1
n 1 5 5

0.08

1000 R 5.8667
R RM 170.45

EXAMPLE 4
Solution
c)
d)

Annual cost = Annual interest payment + annual deposit

= RM 100 + RM 170.45 = RM 270.45
End of
period (year)

Interest
earned

Annual
deposit

Amount at the
end of period

MYR 0.00

MYR 170.46

MYR 170.46

MYR 13.64

MYR 170.46

MYR 354.55

MYR 28.36

MYR 170.46

MYR 553.37

MYR 44.27

MYR 170.46

MYR 768.10

MYR 61.45

MYR 170.46

MYR 1,000.00

170.46 x 8%
354.55 x 8%

170.46 + 13.64 +170.46

354.55 + 28.36 +170.46

5.4 ANNUITY WITH

CONTINUOUS
COMPOUNDING
Future value of the
Present value of the
annuity:

annuity:

eektkt 11
SS R
R kkp

ee p 11

11eektkt
AA R

R kkp
ee p 11

where :

R = Periodic payment
k = annual continuous compounding

rate
t = time in years
p = number of payments in 1 year

EXAMPLE 5
Zainal wins an annuity that pays RM1000 at the end of
every 6 months for 4 years. If money is worth 10% per
annum continuous compounding, what is
a) The future value of this annuity at the end of four
years?
b) The present value of this annuity?
Solution
R 1000;
k 10%;
p2

t 4

e 0.1 4 1
a) S 1000 0.1

2
e 1
S RM 9 592.63
1 e 0.1 4

b) A 1000

0 .1
2

e 1
A RM 6 430.13

EXAMPLE 6
Ah Chong won an annuity that pays RM5000 at the end of
every 3 months for 5 years. If money is worth 6% per
annum continuous compounding, calculate
a) the future value of this annuity at the end of 5 years.
b) the present value of this annuity.
Solution