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ANNUITIES

This lesson tackles about the annuities

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Cess
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7 views

ANNUITIES

This lesson tackles about the annuities

Uploaded by

Cess
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ANNUITIES

Ordinary Annuity

In ordinary annuity, the equal


payments are made at the end
of each compounding period
starting from the first
compounding period.
From the cash flow diagram shown above, the future amount F is the
sum of payments starting from the end of the first period to the end of
the nth period. Observe that the total number of payments is n and the
total number of compounding periods is also n. Thus, in ordinary
annuity, the number of payments and the number of compounding
periods are equal.
(Or uniform series compound-amount factor )
The factor

is called sinking-fund factor and is denoted by (A/F,i,n).


Deferred Annuity

In deferred annuity the first payment is deferred a certain


number of compounding periods after the first. In the
diagram below, the first payment was made at the end of
the kth period and n number of payments was made.
The n payments form an ordinary annuity as indicated in
the figure.
In the diagram, the first payment was made at the end of the kth period
and n number of payments was made. The n payments form an
ordinary annuity as indicated in the figure.
Annuity Due

In annuity due, the equal payments are made


at the beginning of each compounding period
starting from the first period
As indicated in the figure above, F1 is the sum of ordinary annuity
of n payments. The future amount F of annuity due at the end
of nth period is one compounding period away from F1. In
symbol, F = F1(1 + i).
Perpetuity

Perpetuity is an annuity where the payment period


extends forever, which means that the periodic
payments continue indefinitely.
There is no definite future in perpetuity, thus,
there is no formula for the future amount.
PROBLEMS
▪ 1. What is the present worth of a P500 annuity starting at the end of the third year
and continuing to the end of the fourth year, if the annual interest rate is 10%?
▪ 2. Today, a businessman borrowed money to be paid in 10 equal payments for 10
quarters. If the interest rate is 10% compounded quarterly and the quarterly
payment is P2,000, how much did he borrow?
▪ 3. What annuity is required over 12 years to equate with a future amount of P20,000?
Assume i = 6% annually.
▪ 4. What is the accumulated amount of five-year annuity paying P6,000 at the end of
each year, with interest at 15% compounded annually?
▪ 5. A person buys a piece of lot for P100,000 downpayment and 10 deferred semi-
annual payments of P8,000 each, starting three years from now. What is the present
value of the investment if the rate of interest is 12% compounded semi-annually?

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