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Definition of terms
• Annuity – a sequence of payments made at equal (fixed) intervals or
periods of time.
• Payment interval – the time between successive payment
• Term of annuity, t – time between the first payment interval and last
payment interval.
• Regular or Periodic payment, R – the amount of each payment
• Amount (Future Value) of annuity, F – sum of future values of all the
payments to be made during the entire term of annuity
• Present value of annuity, P – sum of present values of all the
payments to be made during the entire term of annuity
Definition of terms
Annuities
According to payment interval and Simple Annuity General Annuity
interest period An annuity where the payment An annuity where the payment
interval is the same as the interest interval is not the same as the
period interest period
According to time of payment Ordinary Annuity Annuity Due
(or annuity immediate) A type of annuity in which the
A type of annuity in which the payments are made at the
payments are made at the end of beginning of each payment interval
each payment interval
Amount (Future Value) of an Ordinary
Annuity (Annuity Immediate)
𝑛
(1 + 𝑗) −1
𝐹=𝑅
𝑗
𝑅 = 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑗 = 𝑖𝑠 𝑡ℎ𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑, 𝑎𝑛𝑑
𝑛 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
Example
• In order to save for high school graduation, Marie decided to save
₱200.00 at the end of each month. If the bank pays 0.250%
coumpounded monthly, how much will her money be at the end of 6
years?
SOLUTION:
Given:
𝑅 = 200 𝑡=6
𝑚 = 12 𝑛 = 𝑚𝑡 = 12 6 = 72 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
𝑖 𝑚 = 0.250% = 0.0025
0.0025
𝑗= = 0.0002083. . .
12
Find: 𝐹
(1 + 𝑛
𝑗) −1
𝐹=𝑅
𝑗
72
(1 + 0.0002083. . . ) −1
𝐹 = 200
0.0002083. . .
𝐹 = ₱14,507.02
Example
• Suppose Mrs. Remoto would like to save ₱3,000
at the end of each month, for six months, in a
fund that gives 9% compounded monthly. How
much is the amount or future value of her
savings after 6 months?
Present Value of an Ordinary Annuity
(Annuity Immediate)
−𝑛
1 − (1 + 𝑗)
𝑃=𝑅
𝑗
𝑅 = 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑗 = 𝑖𝑠 𝑡ℎ𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑, 𝑎𝑛𝑑
𝑛 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
Example
• Suppose Mrs. Remoto would like to know the present
value of her monthly deposit of 3,000 when interest is
9% compounded monthly. How much is the present
value of her savings at the end of 6 months?
Cash Value/Cash Price
• It is equal to the down payment (if there is any ) plus the
present value of the installment payments.