G E N E R A L

ANNUITY
General Annuity - an
annuity where the
payment interval is not
the same as the interest
compounding period
General Ordinary Annuity
- a general annuity in
which the periodic payment
is made at the end of the
payment interval
Examples of General Annuity:

(1) monthly installment payment

of a car, lot or house with an
interest rate that is compounded
annually;
Examples of General Annuity:

(2) paying a debt semi-annually

when the interest is
compounded monthly
 General Annuity

𝑭
 

𝑃 𝑅 𝑅 𝑅
 

𝑅 𝑅 . .. 𝑅
             

0 1 2 3 4 5 . .. 𝑛
               
The main difference is that

“the payment interval is

not the same as the
interest compounding
period.”
 

The extra step occurs in

finding : the given
interest rate per period
must be converted
to an equivalent rate per
payment interval.
Equivalent rates - two
annual rates with different
conversion periods that will
earn the same compound
amount at the end of a
given number of years
 
Formula to find the
per conversion period
 
𝑚
𝑟 ( )−1
𝑗 = 1+(𝑚 ) 𝑚𝑗

 
= per conversion
period
 
= frequency of conversion for
  
Formula to find Future Value
in General Annuity
 
𝑛
𝑅 [(1+ 𝑗 ) −1]
𝐹=
𝑗
 
= Regular payments
= total no. of payments
j = Equivalent Rate per conversion period
EXAMPLE 1. Mel started to
deposit ₱1,000 monthly in a
fund that pays 6%
compounded quarterly.
How much will be in the
fund after 15 years?
G E N E R A L

ANNUITY
The cash flow for this problem
is shown in the diagram
below.
EXAMPLE 1. Mel started to
deposit ₱1,000 monthly in a
fund that pays 6%
compounded quarterly.
How much will be in the
fund after 15 years?
 Given:
𝑅=¿ ₱1,000
 

𝑟=¿ 6% or 0.06
 

𝑚=¿ 4
 
EXAMPLE 1. Mel started to
deposit ₱1,000 monthly in a
fund that pays 6%
compounded quarterly.
How much will be in the
fund after 15 years?
 Given:
𝑅=¿ ₱1,000
 

𝑟=¿ 6% or 0.06
 

𝑚=¿ 4
 

= 12
EXAMPLE 1. Mel started to
deposit ₱1,000 monthly in a
fund that pays 6%
compounded quarterly.
How much will be in the
fund after 15 years?
 Given:
𝑅=¿ ₱1,000
 

𝑟=¿ 6% or 0.06
 

𝑚=¿ 4
 

= 12
𝑡=¿15 years
 

𝑛=¿ 12x15 = 180

 

Find : 𝐹
 
 𝑚
𝑟 ( )−1
𝑗 = 1+
𝑚( ) 𝑚𝑗

4
 

0.06 ( ) −1
(
𝑗 = 1+
4 ) 12

 
  
𝑛
𝑅 [(1+ 𝑗 ) −1]
𝐹=
𝑗
  180
1,000 [ (1+0.004975 ) −1]
𝐹=
0.004975

𝐹=₱ 290,076.28
EXAMPLE 2. A teacher saves
₱5,000 every 6 months in a
bank that pays 0.25%
compounded monthly. How
much will be her savings
after 10 years?
G E N E R A L

ANNUITY
The cash flow for this problem
is shown in the diagram
below.
Given:
𝑅=¿ ₱5,000
 

𝑟=¿ 0.25% or 0.0025

 

𝑚=¿ 12
 
EXAMPLE 2. A teacher saves
₱5,000 every 6 months in a
bank that pays 0.25%
compounded monthly. How
much will be her savings
after 10 years?
Given:
𝑅=¿ ₱5,000
 

𝑟=¿ 0.25% or 0.0025

 

𝑚=¿ 12
 

2
EXAMPLE 2. A teacher saves
₱5,000 every 6 months in a
bank that pays 0.25%
compounded monthly. How
much will be her savings
after 10 years?
Given:
𝑅=¿ ₱5,000
 

𝑟=¿ 0.25% or 0.0025

 

𝑚=¿ 12
 

2  

t 10 years
𝑛=¿ 2x10 = 20
 

Find : 𝐹
 
Given:
𝑅=¿ ₱5,000
 

𝑟=¿ 0.25% or 0.0025

 

𝑚=¿ 12
 

2  

t 10 years
𝑛=¿ 2x10 = 20
 

Find : 𝐹
 
 𝑚
𝑟 ( )−1
(
𝑗 = 1+
𝑚 ) 𝑚𝑗

12
 

0.0025 ( ) −1
(
𝑗 = 1+
12 ) 2

 
  
𝑛
𝑅 [(1+ 𝑗 ) −1]
𝐹=
𝑗
  20
5,000 [ (1+0.001251 ) − 1 ]
𝐹=
0.001251

𝐹=₱ 101,197.42
1. On a girl's 10th birthday,
her father started to deposit
P5,000 quarterly at the end of
each term in a fund that pays
1% compounded monthly.
How much will be in the fund
on his daughter’s 17 th

birthday?𝐹=₱ 144,832.94
 
2. In order to save for her high
school graduation, Kathrina
decided to save P200 at the end
of every other month, starting the
end of the second month. If the
bank pays 0.250% compounded
monthly, how much will be her
money at the end of 5 years?
𝐹 = ₱ 6,036.42
 
ANSWERS
 1. Given:
𝑅=¿ P5,000
 

𝑡 =7 𝑦𝑒𝑎𝑟𝑠
 

𝑟=¿ 1% or 0.01
 

𝑚=¿ 12
 

𝑛=¿ 4x7 = 28
 

𝑚 𝑗 =¿4
Find : 𝐹
 
 
1
𝑟
𝑚
( )−1
 
[( ) ]
𝑗 = 1+
𝑚
𝑚𝑗

1
0.0 1 ( )
12

 
[ 12 ) ]
𝑗= (1+
4
−1
 
𝑛
𝑅 [(1+ 𝑗 ) −1]
𝐹=
𝑗
  28
5,000 [ (1+0.002502 ) − 1 ]
𝐹=
0.002502

𝐹=₱ 144,832.94
 
 2. Given:
𝑅=¿ P200
 

𝑡=¿ 5 years
 

𝑟=¿ 0.25% or 0.0025

 

𝑚=¿ 12
 

𝑛=¿ 6x5= 30
 

𝑚 𝑗 =¿ 6
 

Find : 𝐹
 
 
1
𝑟
𝑚
( )−1
 
[( ) ]
𝑗 = 1+
𝑚
𝑚𝑗

1
0.0 025 ( )
12

 
[ 12 ) ]
𝑗= (1+
6
−1
  
𝑛
𝑅 [(1+ 𝑗 ) −1]
𝐹=
𝑗
  30
200 [ ( 1+ 0.000417 ) − 1 ]
𝐹=
0.000417

𝐹=₱ 6,036.42
 
  
Formula to find the Present
Value in General Annuity
 
−𝑛
𝑅 [ 1 − ( 1+ 𝑗 ) ]
𝑃=
𝑗
 
= Regular payments
 
= total no. of payments
= per conversion
period
  
Formula to find the Regular
Payments in General Annuity

( 𝑃𝑗)
 

𝑅= −𝑛
[1 − (1 + 𝑗 ) ]
 
= Regular payments
 
= total no. of payments
= per conversion
period
Example 1. Ken borrowed an
amount of money from Kat. He
agrees to pay the principal plus
interest by paying P38,973.76
each year for 3 years. How
much money did he borrow if
interest is 8% compounded
quarterly?
 The cash flow for this problem
is shown in the diagram below.

𝑃?
 

𝑃38,973.76
 
𝑃38,
 
973.76 𝑃38,
 
973.76

0  
1  
2
 
3
 Given:
𝑅=¿ P38,973.76
 

𝑟=¿ 8% or 0.08
 

𝑚=¿ 4
 

1
𝑡=¿ 3 years
 

𝑛=¿ 1x3= 3
 

Find : 𝑃
 
 
1
𝑟
𝑚
( )−1
 
[( ) ]
𝑗 = 1+
𝑚
𝑚𝑗

1
0. 08 (4
)
 
[ 4 )]
𝑗 = ( 1+ −
1
1
  
−𝑛
𝑅 [ 1 − ( 1+ 𝑗 ) ]
𝑃=
𝑗
  −3
38,973.76 [ 1 − ( 1+0.082432 ) ]
𝑃=
0.082432

𝑃= ₱ 100,000.03
 
EXAMPLE 2. Mrs. Remoto would
like to buy a television (TV) set
payable monthly for 6 months
starting at the end of the month.
How much is the cost of the TV
set if her monthly payment is
P3,000 and interest is 9%
compounded semi-annually?
 The cash flow for this problem
is shown in the diagram
below.
𝑃?
 

𝑃3,000
 
𝑃3,000
 
𝑃3,000
 
𝑃3,000
 
𝑃3,000
 
𝑃3,000
 

0 1 2 3 4 5 6
             
 Given:
𝑅=¿ P3,000
 

𝑟=¿ 9% or 0.09
 

𝑚=¿ 2
 

12
𝑡=¿6 months
 

𝑛=¿ 6
 

Find : 𝑃
 
 
1
𝑟
𝑚
( )−1
 
[( ) ]
𝑗 = 1+
𝑚
𝑚𝑗

1
0. 09 (2
)
 
[ 2 )]
𝑗 = ( 1+
12
−1
  
−𝑛
𝑅 [1 −(1+ 𝑗 ) ]
𝑃=
𝑗
  −6
3,000 [ 1 − ( 1+0.007363 ) ]
𝑃=
0.007363

𝑃= ₱ 17,545.09
 
Answer the following
annuity problems. Show
your solution.
Find the future value:

Annual payments of P1,000

TIME’S UP!
at the end of each term for
8 years with interest rate of
6% compounded quarterly
𝐹=₱ 9,946.06
Find the present value:

Annual payments of P1,000

at the end of each term for
8 years with interest rate of
6% compounded quarterly
𝑃= ₱ 6,176.41
Find the future value:

Semi-annual payments of
P8,000 at the end of each
TIME’S UP!
term for 12 years with interest
rate of 12% compounded
quarterly
𝐹=₱ 411,461.66
 
Find the cash value:

Semi-annual payments of
TIME’S UP!
P8,000 at the end of each term
for 12 years with interest rate
of 12% compounded quarterly

𝑃= ₱ 99,573.23
Quiz/Assignment:
Bond paper

Solve the following

problems on General
Annuity. Show your
solution.
1. Find the future value of
an ordinary annuity of
P5,000 payable semi-
annually for 10 years if
money is worth 9%
compounded annually.
2. To pay for his debt at 12%
compounded semi-annually,
Ruben committed for 8
quarterly payments
of P24,491.28 each. How
much did he borrow?
3. The buyer of a car pays
P169,000 cash and P12,000
every month for 5 years. If
money is 10% compounded
annually, how much is the
cash price of the car?
ANSWERS
 1. Given:
𝑅=¿ P5,000
 

𝑟=¿ 9% or 0.09
 

𝑚=¿ 1
 

1 𝑝𝑡
 
 

2
𝑡 =10 𝑦𝑒𝑎𝑟𝑠
𝑛=¿ 2x10 = 20
 

Find : 𝐹
 
 1
𝑟
𝑚
( )−1
𝑗 = 1+
[(
𝑚 ) ] 𝑚𝑗

1
1
() 1 𝑝𝑡
 

0.0 9
[(
𝑗 = 1+
1 )] 2
−1

𝑗 =0.044031 1 𝑝𝑡
   
 
𝑛
𝑅 [(1+ 𝑗 ) −1]
1 𝑝𝑡
 

𝐹=
𝑗
1 𝑝𝑡
 

  20
5,000 [ (1+0.044031 ) − 1 ]
𝐹=
0.044031

𝐹=₱ 155,274.64 2 𝑝𝑡𝑠

   
 2. Given:
𝑅=¿ P24,491.28
 

𝑟=¿ 12% or 0.12

 

𝑚=¿ 2
 

1 𝑝𝑡
   

4
𝑛=¿ 8
 

Find : 𝑃
 
 
1
𝑟
𝑚
( )−1
 
[( ) ]
𝑗 = 1+
𝑚
𝑚𝑗

1
0. 12 ( ) 2  
1 𝑝𝑡
[ 2 )]
𝑗 = ( 1+ −1
4

𝑗=0.029563 1 𝑝𝑡
   
 
−𝑛
𝑅 [ 1 − ( 1 + 𝑗 ) 1 ]𝑝𝑡  

𝑃=
𝑗
1 𝑝𝑡
 

  −8
24,491.28 [ 1 − ( 1+0.029563 ) ]
𝑃=
0.029563

𝑃= ₱ 172,238.62 2 𝑝𝑡𝑠
 
 3. Given:
𝐷𝑃=¿ P169,000
 

𝑅=¿ P12,000
 

𝑟=¿ 10% or 0.10

 

1 𝑝𝑡
 

𝑚=¿ 1
 

12
𝑡=¿ 5 years
 

𝑛=¿ 60
 

𝑃/𝐶𝑃
 

Find :
 1
𝑟
𝑚
( )−1
[( ) ]
𝑗 = 1+
𝑚
𝑚𝑗

1
( 1
) 1 𝑝𝑡
 

0. 10
[ 1 )]
𝑗 = ( 1+
12
−1

𝑗=0.007974 1 𝑝𝑡
   
 𝑅 [ 1 − ( 1 + 𝑗 ) 1] 𝑝𝑡
−𝑛
 

𝑃=
𝑗 1 𝑝𝑡
 

− 60
12,000 [ 1 − ( 1+0.007974 ) ]
𝑃=
0.007974

𝑃= ₱ 570,464.24 2 𝑝𝑡𝑠
   
 

₱ 𝟕𝟑𝟗 , 𝟒𝟔𝟒 . 𝟐𝟒
 

2 𝑝𝑡𝑠
 
 23 POINTS
+ 2 POINTS
25 POINTS
We will now apply the
concepts of present and
future values to solve
problems about
cash flows.
Cash Flow
and
Fair Market
A cash flow is a term that
refers to payments
received (cash inflows) or
payments or deposits
made (cash outflows).
The fair market value or
economic value of a cash
flow (payment stream) on a
particular date refers to a
single amount that is
equivalent to the value of the
payment stream at that date.
This particular date is
called the focal date.
EXAMPLE 1. Mr. Ribaya
received two offers on a
lot that he wants to sell.
Mr. Ocampo has offered
₱50,000 and P1 million
lump sum payment
5 years from now.
Mr. Cruz has offered
₱50,000 plus P40,000
every quarter for five
years.
Compare the fair market
values of the two offers if
money can earn 5%
compounded annually.

Which offer has a higher

market value?
Given:
Mr. Ocampo’s offer Mr. Cruz’s Offer

• ₱50,000 down • ₱50,000 down

payment payment
• P1,000,000 after • P40,000 every
5 years quarter for 5
years

𝑟= 5%  ,𝑚 =1 ,𝑡 =5
 
Find:

fair market value of

each offer
Choose a focal date and
determine the values of
the two offers at that
focal date.
 

SOLUTION 1.
Choose the focal date to be
the start of the term. Since
the focal date is at ,
compute for the present
value of each offer.
Mr. Ocampo’s Offer

 
₱ 50,000 𝑃1,000,000
 

0 1 2 3 4 5
           
Mr. Ocampo's offer:

Since P50,000 is offered

today, then its present value
is
still P50,000.
Mr. Ocampo’s Offer

 
₱ 50,000 𝑃1,000,000
 

0 1 2 3 4 5
           
Mr. Ocampo's offer:

The present value of

P1,000,000 offered five
years from now is:
Mr. Ocampo’s Offer

 
₱ 50,000 𝑃1,000,000
 

0 1 2 3 4 5
           
 
𝐹
𝑃= (𝑚𝑡 )
𝑟
( 1+
𝑚 )
1,000,000
𝑃= ( 1 𝑥 5)
0.05
1+( 1 )
𝑃= P 783,526.17
 

Fair Market Value (FMV)

+
𝐹𝑀𝑉 =¿ P 833,526.17
   

*Focal date is at the start of the term

Mr. Cruz's offer:
Compute for the present
value of a general annuity
with quarterly payments
but with annual
compounding at 5%.
Given:
Mr. Ocampo’s offer Mr. Cruz’s Offer

• ₱50,000 down • ₱50,000 down

payment payment
• P1,000,000 after • P40,000 every
5 years quarter after 5
years

𝑟= 5%  ,𝑚 =1 ,𝑡 =5
 
 1
𝑟
𝑚
( )−1
𝑗=
[( 1+
𝑚 ) ] 𝑚𝑗

1
0. 05
1
()
[(
𝑗 = 1+
1 )]4
−1

𝑗=0. 012272
 
  
−𝑛
𝑅 [1 −(1+ 𝑗 ) ]
𝑃=
𝑗
  − 20
40,000 [1 − (1+0.012272 ) ]
𝑃=
0.012272

𝑃= ₱ 705,574.33
 
 

Fair Market Value (FMV)

₱50,000
+
𝐹𝑀𝑉 =¿ P 755,574.33
   

*Focal date is at the start of the term

Hence, Mr. Ocampo's offer has
a higher market value. The
difference between the market
values of the two offers at the
start of the term is
P833,526.17  P755,574.33 =
SOLUTION 2. Choose
the focal date to be the
end of the term.
Given:
Mr. Ocampo’s offer Mr. Cruz’s Offer

• P50,000 down • 50,000 down

payment payment
• P1,000,000 after • P40,000 every
5 years quarter after 5
years

𝑟= 5%  ,𝑚 =1 ,𝑡 =5
 
 

Mr. Ocampo's offer:

At the end of the term,

P1,000,000 is valued as such
(because this is the value at
).
The future value of
P50,000 at the end of the
term at 5% compounded
annually is given by
  
( 𝑚𝑡 )
𝑟
(
𝐹= 𝑃 1+
𝑚 )
 
(1 𝑥5)
0.05
𝐹=50,000 1+ (
1 )
𝐹=P63,814.08
 
  

Fair Market Value ()

+
𝐹𝑀𝑉 =¿P 1,063,814.08
   

*Focal date is at the end of the term

Mr. Cruz's offer:

The future value of this

ordinary general annuity
is given by:
  
𝑛
𝑅 [(1+ 𝑗 ) −1]
𝐹=
𝑗
  20
40,000 [ ( 1+0.012272 ) − 1 ]
𝐹=
0.012272

𝐹=₱ 900,507.34
 
The future value of
P50,000 at the
end of the term is

P63,814.08
  

Fair Market Value ()

+
𝐹𝑀𝑉 =¿ 𝑃 964,321.42
   

*Focal date is at the end of the term

Hence, Mr. Ocampo's offer has
a higher market value. The
difference between the market
values of the two offers at the
end of the term is

P1,063,814.08  P964,321.42
= P99,492.66
Company A offers P150,000 at the
end of 3 years plus P300,000 at
the end of 5 years. Company B
offers P25,000 at the end of each
quarter for the next 5 years.
Assume that money is worth 8%
compounded semi-annually.
Which offer has a better market
value?
Given:
Company A Company B
P150,000 at the
end of 3 years, R = P25,000
and t = 5 years
P300,000 at the mj = 4
end of 5 years

r = 8%, m = 2
Company A offer
𝑃150,000  
𝑃300,000
 

0 1 2 3 4 5
           

Company B offer
 
𝑃 25,000
𝑃 25,000
𝑃 25,000
 
𝑃
. .. 25,000
     

0 1 2 3 . .. 20
           
 Focal Date Start of the Term
Company A offer
The present value of P150,000 three
years from now is
 
𝐹
𝑃= ( 𝑚𝑡)
( 1 +𝑟 / 𝑚 )
 
150,000
𝑃= ( 2 𝑥 3)
( 1 +0.08 /2 )
  
150,000
𝑃= ( 2 𝑥 3)
( 1 +0.08 /2 )
𝑃= ₱118,547.18
 

The present value of P300,000 five years

from now is
 
𝐹
𝑃= ( 𝑚𝑡)
( 1 +𝑟 / 𝑚 )
 The present value of P300,000 five
years from now is
 
𝐹
𝑃= ( 𝑚𝑡)
( 1 +𝑟 / 𝑚 )
 
300,000
𝑃= ( 2 𝑥 5)
( 1 +0.08 /2 )
𝑃= ₱202,669.25
 Focal Date Start of the Term
Company A offer
 

+
P 321,216.43
 

Fair Market
Value (FMV)
 Focal Date Start of the Term
Company B offer
Compute for the present value of a
general annuity with quarterly
payments but with semiannual
compounding at 8%.

Solve the equivalent rate, compounded quarterly, of 8% compounded semi−an ual y.
 
𝑚

𝑗 =(1+𝑟 / 𝑚 )
( )
𝑚𝑗
−1
 
2
() )
4
𝑗 = ( 1+0.08 / 2 −1

𝑗 =0.019804
The present value of an annuity is
 
−𝑛
𝑅 [1 −(1+ 𝑗 ) ]
𝑃=
𝑗
  −20
25,000 [ 1 − ( 1+0.019804 ) ]
𝑃=
0.019804

𝑃= ₱409,560.09
 Focal Date Start of the Term
Company A offer
 
Fair Market Value (FMV) =

Company B offer
 
Fair Market Value (FMV) =

*Therefore, Company B's offer is

preferable since its market value is larger.
Quiz: bond paper
Answer the following
annuity problems:
Show your solution.
1. Find the future value of an
ordinary annuity of P7,000
payable semi-annually for 6
years if money is worth 4.5%
compounded monthly.
2. Mr. Bajada paid P200,000 as
down payment for a farm. The
remaining amount (liability) is to
be settled by paying P16,600 at
the end of each month for 5 years.
If interest is 5% compounded
semi-annually, what is the cash
price of his farm?
3. A television (TV) set is for
sale at P13,499 in cash or on
installment terms, P2,500 each
month for the next 6 months at
9% compounded annually. If
you were the buyer, what
would you prefer, cash or
installment? Why?
ANSWERS
1. Given:
R = P7,000
r = 4.5% or 0.045
m = 12 1pt
mj = 2
t = 6 years
n = 12
Find: F
 1
𝑟
𝑚
( )−1
𝑗=
[( ) ]
1+
𝑚
𝑚𝑗

1
0. 045 ( )
12

[ 12 ) ]
𝑗 = ( 1+ − 1
2 1pt

𝑗=0.022712
 
1pt
 𝑛
𝑅 [ ( 1 + 𝑗 ) − 11pt
]
𝐹=
𝑗
1pt
  12
7 , 000 [ (1+0.0 22712 ) − 1 ]
𝐹=
0. 022712

𝐹=₱ 𝟗𝟓 ,𝟑𝟐𝟗 . 𝟒𝟒
 
2pts
2. Given:
DP = P200,000
R = P16,600
r = 5% or 0.05
1pt
m=2
mj = 12
t = 5 years
n = 60
Find: P/CP
 1
𝑟
𝑚
( )−1
[( ) ]
𝑗 = 1+
𝑚
𝑚𝑗

1
0. 05 ( 2
)
[ 2 )]
1pt
𝑗= (1+
12
−1

𝑗=0.004124
 
1pt
 −𝑛
𝑅 [ 1 − ( 1+ 𝑗 ) ]1pt
𝑃=
𝑗
1pt
  −60
16 , 6 00 [ 1 − ( 1+0.0 04124 ) ]
𝑃=
0.0 04124

𝑃= ₱880,742.24
2pts
 

₱ 𝟏,𝟎𝟖𝟎,𝟕𝟒𝟐.𝟐𝟒
 

2 𝑝𝑡𝑠
 
3. Given:
R = P2,500
r = 9% or 0.09
m=1 1pt
mj = 12
t = 6 months
n=6
Find: P
 1
𝑟
𝑚
( )−1
[(
𝑗 = 1+
𝑚 )] 𝑚𝑗

1
0. 09
1
( )
[( )] 12 1pt
𝑗 = 1+ −1
1

𝑗=0.007207
 
1pt
 −𝑛
𝑅 [ 1 − ( 1+ 𝑗 ) ]1pt
𝑃=
𝑗
1pt
  −6 0
2 , 5 00 [ 1− (1+0.0 07207 ) ]
𝑃=
0.007207

𝑃= ₱14,628.77 2pts
decision 1pt

reason 1pt
Prob. # 1 – 7 points
Prob. # 2 – 9 points
Prob. # 3 – 9 points

TOTAL – 25 POINTS