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Annuities and Amortization: Classifications Formula Sample Problems

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118 views27 pages

Annuities and Amortization: Classifications Formula Sample Problems

Uploaded by

Mr.Clown 107
Copyright
© © All Rights Reserved
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ANNUITIES

and
AMORTIZATION
Definition
Classifications
Formula
Sample Problems
ANNUITY
Annuity is a sequence of payments
made at equal interval of times usually
monthly, semi-annually, quarterly, or
annually in order to pay a loan or
create a fund.
ANNUITY
Examples:
(1) installment payments
(2) rental payments
(3) life insurance premiums
(4) regular deposit to a savings account
(5) periodic pensions
(6) Mortgages
(7) car payments
Definition of Terms
Payment interval – the time
between consecutive payments of
annuity (monthly, semi-annually,
quarterly, annually, etc.)

Periodic payment (R) – amount


paid during each installment period.
Definition of Terms
Term of annuity (t) – the time from
the beginning of the first payment
interval to the end of the last
payment interval.
The total number of conversion
periods in the term of annuity is
given by n = tm.
Definition of Terms
Present value of an
annuity (P) – sum of
present value of all the
payments to be made
during the entire term of
the annuity.
Definition of Terms
Amount (Future Value)
of an annuity (F) – sum
of future values of all the
payments to be made
during the entire term of
the annuity.
ANNUITIES

Finding the Present Value, Future


Value, Cash Value/Cash Prize and
Periodic Payment
Amount (Future Value) of an
Annuity
The amount of an annuity, denoted by F,
is the sum of all the values of all the
periodic payments at the end of the term.
In order to save for her high school
graduation, Maria decided to save
USD 500 at the end of each month.
If the bank pays 0.3% compounded
monthly, how much will her money
be at the end of 5 years?
Determine the amount and
present value of an ordinary
annuity of USD 500 each
quarter payable for 6 years and
9 months, if money is worth
14% compounded quarterly.
1) Quarterly payments of USD 2,000
for 5 years with interest rate of 8%
compounded quarterly
2) Semi-annual payments of USD
8,000 for 12 years with interest rate
of 12% compounded semi-annually
What must be deposited every
6 months in a fund paying
15% compounded
semiannually in order to have
USD 50 000 in 9 years?
John borrowed USD 200 000. He
agrees to pay the principal plus
interest by paying an equal
amount of money each year for 5
years. What should be his annual
payment if interest is 9%
compounded annually?
Micah saves USD 6000
every 3 months in a bank
that pays 0.75%
compounded monthly. How
much will be her savings
after 10 years?
Ken borrowed an amount of
money from Kat. He agrees to
pay the principal plus interest by
paying USD 38,973.76 each year
for 3 years. How much money
did he borrow if interest is 8%
compounded quarterly?
Mrs. Calupe would like to buy
a refrigerator payable monthly
for 9 months starting at the
end of the month. How much
is the cost of the refrigerator if
her monthly payment is USD
9,500 and interest is 8%
compounded quarterly?
AMORTIZATION
Amortization is the action or
process of reducing or paying off
a debt with regular payments. It
is similar with annuity but the
value of the item decreases each
term.
Example
John borrowed P200 000. He
agrees to pay the principal plus
interest by paying an equal
amount of money each year for 5
years. What should be his annual
payment if interest is 9%
compounded annually?
Example
What must be the payment in
every 6 months to pay a loan
of USD 500 000 which is 15%
compounded semiannually in
9 years?

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