An Annuity Is A Series of Equal Payments Occurring at Equal Periods of Time Annuities Occur in The Following Instances

ANNUITIES
An annuity is a series of equal payments occurring at equal periods of time
Annuities occur in the following instances:

1. Payment of a debt by a series of equal payments at equal interval of time.
This occurs when goods are brought on the installment plan, the payments for
w/c are usually of equal amounts paid periodically, usually monthly.
2. Accumulation of a certain amount by setting equal amounts periodically.

This occurs when a person saves equal amounts and deposits these
periodically in a bank; when equal amounts are set aside at equal intervals of
time to take care of the depreciation of equipment & to provide for their
replacement at a definite future time.
3. Substitution of a series of equal amounts periodically in lieu of a lump sum

at retirement of an individual.
Types of Annuities:
An ordinary annuity is one where the equal payments are made at the end of each
payment period starting from the first period.
A deferred annuity is one where the payment of the first amount is deferred a certain
number of periods after the first.
An annuity due is one where the payments are made at the start of each period,
beginning from the first period.
A perpetuity is an annuity where the payment periods extend forever or in w/c the
periodic payments continue indefinitely.
Symbols & their meaning

P = value of money at present
F = value of money at some future time
A = a series of periodic, equal amounts of money
n = number of interest periods
i = interest rate per interest period
ORDINARY ANNUITY
Finding P when A is given
P
0 1 2 3 n-1 n
A A A A A
A(P/F,i%,1)
A(P/F,i%,2)
A(P/F,i%,3)
A(P/F,i%,n-1)
A(P/F,i%,n)
P=A 1 – (1 + i) -n = A ( 1 + i)n - 1
i i ( 1 + i)n
The quantity in brackets is called “uniform series present

worth factor” and is designated by the functional symbol
P/A,i%,n, read as “P given A at i percent in n interest
periods.” And can be expressed as
P = A(P/A,i%,n)
Finding F when A is given
F
0 1 2 3 n-1 n
A A A A
A
A(F/P,i%,1)
A(F/P,i%,n-3)
A(F/P,i%,n-2)
A(F/P,i%,n-1)
(1+i)n - 1
F =A
i
The quantity in brackets is called the “uniform series compound

amount Factor” and is designated by the functional symbol
F/A,i%,n, read as“F given A at I percent in n interest periods. And
can be written as
F = A (F/A,i%,n)
Finding A when P is given
i
A=P 1-(1+i)-n
The quantity in brackets is called the “capital recovery factor.” It is denoted by the
Functional symbol A/P,i%,n w/c is read as “A given P at i percent in n interest
periods.” Hence, A = P(A/P, i%,n)
Finding A When F is Given
i
A = F
(1+i)n-1
The quantity in brackets is called the “sinking fund factor.” It is denoted by

the Functional symbol A/F,i%,n w/c is read as “A given F at i percent in n
interest Periods.” Hence,
A = F(A/F,i%,n)
1. What are the present worth and the accumulated amount of a 10-year
annuity paying P10,000 at the end of each year, w/ interest at 15%
compounded annually?
Solution:
A = P10,000 n = 10 i = 15%
F
0 1 2 3 9 10
P10,000 P10,000 P10,000 P10,000

P10,000
P = A(P/A,i%,n)
[1-(1+i)-n ]
= A i
= P10,000 [1 – (1.15)-10]
0.15
P = P50,187.68626
F = A(F/A,i%,n)
= A [(1+i)n - 1
i
= 10,000 [(1.15)10-1]
0.15
= P203,037.1824
2.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 semi-
annually?
Solution:
Solving for the interest rate per quarter,
(1+r/4)4 – 1 = (1 + 0.12/2)2 – 1
r/4 = 0.0296 or 2.96%
r = 0.1182520564
P = A (P/A,2.96%,24)
A[1-(1+i)-n ] i = .1182520564/4 = 0.0296

= i
= P500 [1-(1+0.0296)-24]
0.0296
= P500 (17.0087)
= P8,504
SAMPLE PROBLEMS ON ORDINARY ANNUITIES
1. Ria rose borrowed P50,000.00 fr. SSS in the form of calamity loan, w/
int.@8% comp. quarterly payable in equal quarterly installments for
10yrs. Find the quarterly payments.
2. A manufacturing firm wishes to give each 80 employees a holiday
bonus. How much is needed to invest monthly for a yr. @ 12% nominal
interest rate, comp. mo., so that each employee will receive a P2,000.00
bonus?
3. A man paid a 10% down payment of P200,000.00 for a house & lot &
agreed to pay the balance on monthly installments for 5yrs. @ an int.
rate of 15% compounded mo. What was the mo. Inst. In pesos?
4. Money borrowed today is to be paid in 6 equal payments @ the end
of 6 quarters. If the int. is 12% comp. quarterly, how much was initially
borrowed if quarterly payments is P2,000.00?
5. Mr. Robles plans a deposit of P500.00 @ the end of each month for
10yrs. @ 12% annual int., comp. mo. The amt. that will be available in
two yrs. is?
DEFERRED ANNUITY
A deferred annuity is one where the first payment is made several
periods after the beginning of the annuity.
m periods
n periods
Ordinary annuity
periods
Deferred periods
0’
0 A A A A n
1 2 3 m
1 2 3 4
A
FORMULA:
P=A 1 – (1 + i) –n ( 1 + i) -m
i
Sample problem
1. A new generator has just been installed. It is expected
that there will be no maintenance charges until the 6th
year, when P300 will be spent at the end of each
successive year until the generator is scrapped on its
fourteenth year of service. What sum of money set aside
at the time of installation of the generator at 6% will take
care of all maintenance expenses for the generator?
2. A parent wishes to develop a fund for a new born child’s
college education. The fund is to pay P50,000.00 on the
18th, 19th, 20th & 21st birthdays of the child. The fund will
be built up by the deposit of fixed sum on the child’s first to
seventeenth birthday’s. Find the fixed sum if money is
worth 4% per annum.
3. A man loans P187,400.00 from a bank w/ int. at 5%
compounded annually. He agrees to pay to pay his
obligations by paying 8 equal annual payments, the first
being due on the 10th yr. Find the annual payments.
4. A house & lot can be acquired with a down payment of
P500,000.00 and a yearly payment of P100,000.00 at
each year for a period of 10yrs., starting at 5 yrs. from
the date of purchase. If money is worth 14%
compounded annually, what is the cash price of the
property?
5. If money is worth 5% compounded semi-annually, find
the present value of a sequence of 12 semi-annual
payments of P500.00 each, the first of which is due in 4
½ years.
PERPETUITY
it is an annuity where payments are made indefinitely or forever

P
1 2 3 4 5
0
n =∞
A A A A A
P = A/i
SAMPLE PROBLEM:
1. A wealthy man donated a certain amount of money in a bank at a rate of 12% compounded
annually to b able to pay the following scholarship awards; P4,000 per year for the first 5 yrs.; P6000
per yr. for the next 5 yrs. and P9,000 per year on the years thereafter. Find the amount of money
deposited by the man.
PF PP
perpetuity
Pd
P9,000 ea.
deferred
PO Annuity
P6,000 ea.
Ordinary annuity
P4,000 ea.
1 2 3 4 5 6 7 8 9 10 11 12 13 14
0’
m=5 n=5
The equation of value at 0 is,

P = PO + Pd + PF
SAMPLE PROBLEMS ON PERPETUITY
1. P 45,000.00 is deposited in a savings account that pays
5% interest compounded semi-annually. Equal annual
withdrawals are to be made from the account, beginning
one year from now and continuing forever. Compute the
maximum amount of the equal annual withdrawal.
2. Find the present value of in pesos, of a perpetuity of P
15,000.00 payable semi-annually if money is worth 8%
compounded quarterly.
3. If money is worth 8%, obtain the present value of perpetuity
of P 1,000.00 payable annually when the first payment is
due at the end of five years.
ANNUITY DUE
- It is the annuity where the payment started at the beginning of the annuity periods.
FINDING P WHEN A IS GIVEN
0 1 2 3 4 n-1 n
A A A A A A
P=A 1 – (1 + i ) – (n-1) +
1
i
F=A ( 1 + i ) (n+1) - 1 1
i
1. A man bought a car costing P 450,000 payable in 5 years at a rate of
24% compounded semi-annually in installment basis. If each semi-
annual payment is payable at the beginning of each period,
determine the amount of each payment?
2. Mr. Asero agrees to pay P 2,500.00 at the beginning of each year for
15 years. If money is worth 4 ½%, find the remaining payments (a)
just after he makes the third payment, (b) just before he makes the
sixth payment. If after making the down payment Mr. Asero failed to
make the next 4 payments, (c) what would he have to pay when the
next payment is due to bring himself back on schedule?
3. Engr. Peter Aventajado loan an amount of P 100,000.00 at a local
commercial bank at 10% compounded annually. How much is his
monthly payment if he is required to pay at the beginning of the first
day of the month for a period of 30 years?
4. What amount of money deposited 20 years ago at 4% interest would
provide a perpetual payment of P 2,000.00 per year?
5. Find the present value of a perpetuity of P 100.00 payable semi-
annually if money is worth 4% compounded quarterly.

An Annuity Is A Series of Equal Payments Occurring at Equal Periods of Time Annuities Occur in The Following Instances

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What are the different types of annuities discussed in the document?

What are the formulas used to calculate the present and future values of an ordinary annuity?

ANNUITIES

An annuity is a series of equal payments occurring at equal periods of time

Annuities occur in the following instances:

2. Accumulation of a certain amount by setting equal amounts periodically.

3. Substitution of a series of equal amounts periodically in lieu of a lump sum

Symbols & their meaning

The quantity in brackets is called “uniform series present

The quantity in brackets is called the “uniform series compound

The quantity in brackets is called the “sinking fund factor.” It is denoted by

P10,000 P10,000 P10,000 P10,000

A[1-(1+i)-n ] i = .1182520564/4 = 0.0296

it is an annuity where payments are made indefinitely or forever

The equation of value at 0 is,

FINDING P WHEN A IS GIVEN

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