Deferred Annuity

by CHED on January 12, 2017

lesson duration of 5 minutes

under General Mathematics

generated on January 12, 2017 at 06:51 am

Tags: Annuities
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Generated: Jan 12,2017 02:51 PM

Deferred Annuity ( 5 mins )

Written By: CHED on May 27, 2016

Subjects: General Mathematics

Tags: Annuities

Resources

n/a

Content Standard

The learner demonstrates understanding of key concepts of simple and compound interests, and simple and general
annuities.

Performance Standard

The learner is able to investigate, analyze and solve problems involving simple and compound interests and simple
and general annuities using appropriate business and financial instruments.

Learning Competencies

The learner calculates the present value and period of deferral of a deferred annuity.

Introduction/Motivation 1 mins

Ask the students what they would like to do on their 18th birthday. Then describe to them the following situation.

Iya, who is celebrating her 17th birthday today, does not want an extravagant party for her 18th birth- day. Instead, she
asks her parents if she could receive P500 per month until her 21st birthday. Iya's mom decided to save today so that
she can provide extra allowance every month after Iya's 18th birth- day. But how much should the mother save today
so that she will have P200 every month for 3 years which is due exactly one year from now?

Tell the students that this is an example of a deferred annuity. Tell them that deferred annuities are series of
payments, as what they have already learned in the past lessons on annuities, but will start on a later date.

Discuss some examples of this type of annuity in real life.

A credit card company offering its clients to purchase today but to start paying monthly with their choice of
term after 3 months.
A real estate agent is urging a condominium unit buyer to purchase now and start paying after 3 years when
the condominium is ready for occupancy.

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A worker who has gained extra income now and wants to save his money so that he can withdraw his money
monthly starting on the day of his retirement from work.

Lesson Proper 1 mins

(a) Review definition of terms.

• Annuity - a sequence of payments made at equal(????xed) intervals or periods of time

• Annuity Immediate or Ordinary Annuity - a type of annuity in which the payments are made at the end of each
period

(b) Present definition of terms

• Deferred Annuity - an annuity that does not begin until a given time interval has passed

• Period of Deferral - time between the purchase of an annuity and the start of the payments for the deferred annuity

(c) Review how to calculate the present value of an annuity immediate or ordinary annuity and give an example.

Review. Suppose Mr. Gran wants to purchase a cellular phone. He decided to pay monthly for 1 year starting at the
end of the month. How much is the cost of the cellular phone if his monthly payment is P2,500 and interest is at 9%
compounded monthly?

Solution.

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(d) Define deferred annuity and illustrate. Give the formula for finding the present value.

a. Discuss the following problem as an introduction to deferred annuity. Emphasize that for deferred annuities, the start
of the payments is on a later date.

Recall the previous example. What if Mr. Gran is considering another cellular phone that has a different payment
scheme? In this scheme, he has to pay P2,500 for 1 year starting at the end of the fourth month. If the interest rate is
also 9% converted monthly, how much is the cash value of the cellular phone?

Note that the two payment schemes have the same number of payments n and the same interest rate per period j.
Their main difference is the start of the payments. The first scheme started at the end of the first interval which makes
it an ordinary annuity.
annuity. The second scheme started on a later date. This annuity is called deferred annuity.
annuity.

In this example, Mr. Gran pays starting at the end of the 4th month to the end of the 15th month. The time
diagram for this option is given by:

Thus, the present value of the cellular phone is P27,953.60.

Comparing the present values of the two schemes, the present value in the second scheme is lower than the present
value in the first because the payments in the second scheme will be received on a later date.

Derive the formula for calculating the present value of a deferred annuity by generalizing the procedure from the
previous example.

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Consider the following time diagram where k artificial payments of R? are placed in the period of deferral.

EXAMPLE 1. On his 40th birthday, Mr. Ramos decided to buy a pension plan for himself. This plan will allow him to
claim P10,000 quarterly for 5 years starting 3 months after his 60th birthday. What one-time payment should he make
on his 40th birthday to pay off this pension plan, if the interest rate is 8% compounded quarterly?

The annuity is deferred for 20 years and it will go on for 5 years. The first payment is due three months (one quarter)
after his 60th birthday, or at the end of the 81st conversion period. Thus, there are 80 artificial payments.

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If you assume that there are payments in the period of deferral, there would be a total of payments.

Time Diagram:

Therefore, the present value of these monthly pensions is P33,538.38.

EXAMPLE 2. A credit card company offers a deferred payment option for the purchase of any appliance. Rose plans
to buy a smart television set with monthly payments of P4,000 for 2 years. The payments will start at the end of 3
months. How much is the cash price of the TV set if the interest rate is 10% compounded monthly?

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Seatwork 1 mins

Seatwork 1. Find the period of deferral in each of the following deferred annuity problem (one way to find the period of
deferral is to count the number of artificial payments)

1. (a) Monthly payments of P2,000 for 5 years that will start 7 months from now Solution. The first payment is at
time 7. The period of deferral will be from time 0 to 6, which is equivalent to 6 periods or 6 months.
2. (b) Annual payments of P8,000 for 12 years that will start 5 years from now Solution. Five years from now is
at time 5. The period of deferral will be from time 0 to time 4. Thus, the period of deferral is 4 periods or 4
years.
3. (c) Quarterly payments of P 5,000 for 8 years that will start two years from now. Solution. Two years from
now will be at time 8 if one quarter is considered as one period. Thus, the period of deferral is from time 0 to
time 7, which is equivalent to 7 quarters or 7 periods.
4. (d) Semi-annual payments of P60,000 for 3 years that will start 5 years from now Solution. The first payment
is due five years from now which is equivalent to time 10 if payments are made semi-annually. The period of
deferral will be from time 0 to time 9, which is equivalent to 9 semi-annual intervals or 9 periods.
5. (e) Payments of P3,000 every 2 years for 10 years starting at the end of 6 years Solution. The first payment
is due at the end of 6 years which is at time 3 if payments are made every 2 years. The period of deferral is
from time 0 to time 2, which is equivalent to 2 periods or 2 two-year intervals.

Seatwork 2. Answer the following problems completely.

1. (a) Emma availed of a cash loan that gave her an option to pay P10,000 monthly for 1 year. The first
payment is due after 6 months. How much is the present value of the loan if the interest rate is 12%
converted monthly? Answer: P107,088.20
2. (b) Adrian purchased a laptop through the credit cooperative of their company. The cooperative provides an
option for a deferred payment. Adrian decided to pay after 4 months of purchase. His monthly payment is
computed as P3,500 payable in 12 months. How much is the cash value of the laptop if the interest rate is
8% convertible monthly? Answer: P39,441.14
3. (c) Mr. and Mrs. Mercado decided to sell their house and to deposit the fund in a bank. After computing the
interest, they found out that they may withdraw P350,000 yearly for 4 years starting at the end of 7 years
when their child will be in college. How much is the fund deposited if the interest rate is 3% converted
annually? Answer: P1,089,533.99
4. A group of employees decided to invest a portion of their bonus. After 3 months from today, they want to
withdraw from this fund P5,000 monthly for 12 months to fund their gathering that they decide to do every
month. How much is the total deposit now if the interest rate is 5% converted monthly? Answer: P57,922.41
5. Anna converted her loan to light payments which gives her an option to pay P1,500 every month for 2 years.
The first payment is due 3 months from now. How much is the amount of the loan if the interest rate is 9%
converted monthly? Answer: P32,346.70

Evaluation 1 mins

(a) Read the following annuity problem. Fill in the blanks in the statements that follow.

A loan of P30,000 is to be repaid monthly for 5 years that will start at the end of 4 years. If interest rate is 12%
converted monthly, how much is the monthly payment?

1. The type of annuity illustrated in the problem is a _____

1. Answer: deferred annuity

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2. The total number of payments is ________.

1. Answer: 60
3. The number of conversion periods in the period of deferral is ________
1. Answer: 47
4. The interest rate per period is _________.
1. Answer: 0.01
5. The present value of the loan is ________.
1. Answer: P30,000

(b) Find the period of deferral in the following problems.

1. Monthly payments of P10,000 for 8 years that will start 6 months from now
1. Answer: 5 months or 5 periods
2. Semi-annual payments of P15,000 for 10 years that will start 5 years from now
1. Answer: 9 periods or 9 half-year intervals
3. Payments of P5,000 every 4 months for 10 years that will start ????ve years from now.
1. Answer: 14 periods or 14 4-month intervals
4. Annual payments of P600 for 20 years that will start 10 years from now

1. Answer: 9 years or 9 periods

5. Payments of P3,000 every 3 years for 12 years starting at the end of 9 years

1. Answer: 2 periods or 2 three-year intervals

(c) Solve the following problems completely.

1. A loan is to be repaid quarterly for 5 years that will start at the end of 2 years. If interest rate is 6% converted
quarterly, how much is the loan if the quarterly payment is P10,000?
1. Answer: P154,694.03
2. A car is to be purchased in monthly payments of P17,000 for 4 years starting at the end of 4 months. How
much is the cash value of the car if the interest rate used is 12% converted monthly?
1. Answer: P626,571.56
3. A mother's savings may allow her to withdraw P50,000 semi-annually for 5 years starting at the end of 5
years. How much is the mother's savings if the interest rate is 8% converted semi-annually?
1. Answer: P284,930.39

Evaluation 1 mins

(a) Read the following annuity problem. Fill in the blanks in the statements that follow.

A loan of P30,000 is to be repaid monthly for 5 years that will start at the end of 4 years. If interest rate is 12%
converted monthly, how much is the monthly payment?

1. The type of annuity illustrated in the problem is a _____

1. Answer: deferred annuity
2. The total number of payments is ________.
1. Answer: 60
3. The number of conversion periods in the period of deferral is ________
1. Answer: 47
4. The interest rate per period is _________.
1. Answer: 0.01
5. The present value of the loan is ________.
1. Answer: P30,000

(b) Find the period of deferral in the following problems.

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1. Monthly payments of P10,000 for 8 years that will start 6 months from now
1. Answer: 5 months or 5 periods
2. Semi-annual payments of P15,000 for 10 years that will start 5 years from now
1. Answer: 9 periods or 9 half-year intervals
3. Payments of P5,000 every 4 months for 10 years that will start ????ve years from now.
1. Answer: 14 periods or 14 4-month intervals
4. Annual payments of P600 for 20 years that will start 10 years from now

1. Answer: 9 years or 9 periods

5. Payments of P3,000 every 3 years for 12 years starting at the end of 9 years

1. Answer: 2 periods or 2 three-year intervals

(c) Solve the following problems completely.

1. A loan is to be repaid quarterly for 5 years that will start at the end of 2 years. If interest rate is 6% converted
quarterly, how much is the loan if the quarterly payment is P10,000?
1. Answer: P154,694.03
2. A car is to be purchased in monthly payments of P17,000 for 4 years starting at the end of 4 months. How
much is the cash value of the car if the interest rate used is 12% converted monthly?
1. Answer: P626,571.56
3. A mother's savings may allow her to withdraw P50,000 semi-annually for 5 years starting at the end of 5
years. How much is the mother's savings if the interest rate is 8% converted semi-annually?
1. Answer: P284,930.39

Generated: Jan 12,2017 02:51 PM

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