ANNUITY

An annuity is a series of equal payments

• Finding F, Given A
uniform series present
worth factor
Ordinary Annuity
• is one where payments are made at the end of each
period
• Finding A, Given P
capital recovery
factor

• Finding A, Given F
sinking fund factor
Examples:
9. What are the present worth and the accumulated
amount of a 10-year annuity paying P10,000 at the end
of each year, with interest at 15% compounded
annually?
10.What is the present worth of P500 deposited at the end
of every three months for 6 years if the interest rate is
12% compounded semiannually?
Examples:
11.A businessman needs P50,000 for his operations. One
financial institution is willing to lend him the money for
one year at 12.5% interest per annum (discounted).
Another lender is charging 14%, with the principal and
interest payable at the end of one year. A third
financier is willing to lend him P50,000 payable in 12
equal monthly installments of P4,600. Which offer is best
for him?
Examples:
12.A chemical engineer wishes to set up a special fund by
making uniform semiannual end-of-period deposits for
20 years. The fund is to provide P100,000 at the end of
each of the last five years of the 20-year period. If
interest is 8% compounded semiannually, what is the
required semiannual deposit to be made?
 Deferred Annuities
• is one where the first payment is made several periods
after the beginning of the annuity

present equivalent at the end of period J will then be the future amount
of an annuity with cash flows of amount A with respect to time 0
Example 13:
Suppose that a father, on the day his son is born, wishes to
determine what lump amount would have to be paid into
an account bearing interest of 12% per year to provide
withdrawals of $2,000 on each of the son’s 18th, 19th,
20th, and 21st birthdays.
Example 14:
When you take your first job, you decide to start saving
right away for your retirement. You put $5,000 per year
into the company’s 401(k) plan, which averages 8%
interest per year. Five years later, you move to another job
and start a new 401(k) plan. You never get around to
merging the funds in the two plans. If the first plan
continued to earn interest at the rate of 8% per year for 35
years after you stopped making contributions, how much
is the account worth?
Annuity Due
• is one where the payments are made at the beginning
of each period
• Find P, Given A
𝐏 = 𝐀(𝟏 + 𝐏/𝐀, 𝐢%, 𝐧 − 𝟏)
• Find F, Given A
𝐅 = 𝐀 𝐅/𝐀, 𝐢%, 𝐧 + 𝟏 − 𝟏
Example 15:
A certain property is being sold and the owner received two
bids.
The first bidder offered to pay P400,000 each year for 5 years,
each payment is to be made at the beginning of each year.
The second bidder offered to pay P240,000 at the first year,
P360,000 the second year, and P540,000 each year for the
next 3 years, all payments will be made at the beginning of
each year.
If money is worth 20% compounded annually, which bid
should the owner of the property accept?
Perpetuity
• is an annuity in which the payments continue indefinitely
𝐀
𝐏=
𝐢
• Example 16: What amount of money invested today at
15% interest can provide the following scholarships:
P30,000 at the end of each year for 6 years, P40,000 for
the next 6 years, and P50,0000 thereafter?
Amortization
• is any method of repaying a debt, the principal and
interest included, usually by a series of equal payments
at equal interval of time
• Example 17: A debt of P5,000 with interest at 12%
compounded semiannually is to be amortized by equal
semiannual payments over the next 3 years, the first due
in 6 months. Find the semiannual payment and construct
an amortization schedule.
Continuous Compounding and
Discrete Payments
• In discrete compounding, the interest is compounded at
the end of each finite-length period, such as a month, a
quarter or a year.
• In continuous compounding, it is assumed that cash
payments occur once per year, but the compounding is
continuous throughout the year.
Example 18:
Compare the accumulated amounts after 5 years of P1,000
invested at the rate of 10% per year compounded:
a. annually,
b. semiannually
c. quarterly
d. monthly
e. daily
f. continuously
Problem Set 2
1. A man wishes his son to receive P200,000 ten years from
now. What amount should he invest if it will earn interest of
10% compounded annually during the first 5 years and 12%
compounded quarterly during the next 5 years?
2. ABC Corporation borrowed P9,000 from XYZ Corporation on
January 1, 2018 and P12,000 on January 1, 2020. ABC
Corporation made a partial payment of P7,000 on January
1, 2021. It was agreed that the balance of the loan would
be amortized by two payments, one on January 1, 2022
and the other on January 1, 2023, the second being 50%
larger than the first. If the interest rate is 12%, what is the
amount of each payment?
Problem Set 2
3. What is the future worth of P600 deposited at the end
of every month for 4 years if the interest rate is 12%
compounded quarterly?
4. A young woman, 22 years old, has just graduated from
college. She accepts a good job and desire to
establish her own retirement fund. At the end of each
year thereafter she plans to deposit P2,000 in a fund at
15% annual interest. How old will she be when the fund
has an accumulated value of P1,000,000?
Problem Set 2
5. Determine the present worth and the accumulated
amount of an annuity consisting of 6 payments of
P120,000 each, the payments are made at the
beginning of each year. Money is worth 15%
compounded annually.
6. Carlos buys a bond that will pay him P10,000 after 3
years. It accumulates interest at an annual interest rate
of 7% with continuous compounding. What is the value
of this bond today?