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Mod 4 Simple and General Annuity

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19 views52 pages

Mod 4 Simple and General Annuity

Uploaded by

joemarksaavedra87
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Simple

and
General
Annuities
Mr. and Mrs. Santos were
planning to acquire house and lot
but have limited budget. They went
to a bank for some advice as to how
they could produce enough amount
for the down payment on a house
and lot they had chosen. This is the
advice of the bank:
If you will invest Php 20 000 at
the end of each year for 5 years in
an account that pays interest at 10
% compounded annually, you will
have the amount of the down
payment of the house and lot.
For Sale
House A –price Php 850 740
House B- price Php 1 221 020
House C- price Php 2 110 000
Down payment 10% of the price
No Price increase for the Next Five Years
a. How much is their investment
after 5 years?
b. Which house did the couple
choose?
c. How much is the present value
of the couple’s investment?
Objectives
1. Define terms that are related to
simple and general annuities.
2. Illustrate and distinguish simple
and general annuities.
3. Represent annuities to real-life
situations.
Annuity
➢ It is a sequence of payments made at
equal (fixed intervals or periods of time.
The following are examples of annuities:
▪ Rental payment
▪ Monthly pensions
▪ Monthly payment for car loan
▪ Educational plan
Classification
of Annuity
Classification of Annuity
A. According to payment
interval and interest period
B. According to time of
payment
C. According to duration
A. According to payment interval and
interest period
1. Simple Annuity
➢ The payment interval is the same as
the interest period.
Example: A deposit of Php 2000 was
made at the end of each month to an
account that earns 5% interest
compounded monthly.
A. According to payment interval and
interest period
2. General Annuity
➢ The payment interval is NOT the
same as the interest period.
Example: Installment payments are
made at the end of each month for a loan
that charges 1.05% interest compounded
annually.
B. According to time of payment
3. Ordinary Annuity(Annuity Immediate)
➢ The payments are made at the end of
each payment interval.
4. Annuity Due
➢ The payments are made at the
beginning of each payment interval.
C. According to duration
5. Annuity Certain
➢ Payments begin and end at definite
times.
Example: A loan payable of Php 10 000 at
the end of the month for 2 years.
C. According to duration
6. Contigent Annuity
➢ Payments extend over an indefinite
or indeterminate length of time.
Examples: life and accident insurance,
pension payments
Definition
of Terms
➢ Annuity - a sequence of
payments made at equal
(fixed) interval or periods of
time
➢ Payment interval - the time
between successive payments
➢ Deferred Annuity - an annuity
in which the periodic payment
is not made at the beginning
nor at the end of each payment
interval, but some later date.
➢ Perpetuities - a series of
periodic payments which are
to run infinitely or forever.
➢ Term of an annuity, t - time
between the first payment
interval and last payment
interval.
➢ Regular or Periodic payment, R
is the amount of each payment.
➢ Amount (Future Value) of an
annuity, F is the sum of the
future values of all payments to
be made during the entire term
of annuity.
➢ Present Value of annuity, P is
sum of present values of all
payments to be made during the
entire term of annuity
➢ Cash Value or Cash Price - down
payment (if there is any) plus
present value of the annuity
Simple Annuity
The payment interval is also the
same as the interest period.
Examples of Simple Annuity
1. A deposit of P5 500 was made at the end of
every three months to an account that earns
5.6% interest compounded quarterly.
2. P2 000 deposited every year for 5 years at
9% per year compounded annually.
3. Payments of P10 000 every six months for
12 years at 6% compounded semi-
annually.
TIME DIAGRAM FOR
SIMPLE ANNUITY

F=Future Value P=Present Value


R=Regular Payment n=number of payments
Example 1
Suppose Mrs. Remoto would like to
save P3 000 every month in a Fund that
gives 9% compounded monthly for 6
months. Illustrate the cash flow in a time
diagram.
Example 1
Example 2
In order to save for her high school
graduation, Marie decided to save P200
at the end of each month and the bank
pays 0.250% compounded monthly for 6
years. Illustrate the cash flow of her
savings in time diagram.
Example 2
Example 3
Mr. Ribaya paid P200 000 as down
payment for a car. The remaining amount
is to be settled by paying P16 200 at the
end of each month for 5 years. If interest
is 10.5% compounded monthly, what is
the cash price of his car?
Example 3
Example 4
Mr. Gojo paid P300 000 as down
payment for a car. The remaining amount
is to be settled by paying P26 500 at the
end of each month for 5 years. If interest
is 7.5% compounded monthly, what is
the cash price of his car?
Example 5
In order to save for his high school
graduation, Geto decided to save P500 at
the end of every three months and the
bank pays 0.250% compounded
quarterly for 6 years. Illustrate the cash
flow of her savings in time diagram.
General Annuity
The payment interval is not the
same as the interest period.
Examples of General Annuity
1. Monthly installment payment of a car, lot,
or house with an interest rate that is
compounded annually.
2. Paying a debt semi-annually when the
interest is compounded monthly.
3. Payments are made at the end of each
month for a loan that charges 1.05% interest
compounded quarterly.
Example 1
Mel started to deposit P1 000
monthly in a fund that pays 6%
compounded quarterly for 15 years. How
much will be in the fund after 15 years?
Example 1
Example 2
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?
Example 2
Example 3
Find the amount of annuity of ₱700
every 6 months (½ year) for 12 years if
interest is 6% compounded monthly.
Example 3
Read each problem carefully and
tell whether each of the given
information describes a simple annuity
or general annuity. Illustrate the cash
flow in time diagram
1. Annual payment of
P400 for 3 years with
an interest at 2%
compounded annually.
2. Monthly payment of P4 200
per quarter for 4 years
with an interest rate of 9%
compounded semi-
annually.
3. Semi-annual payments of
P350 for 8 years that pays
at 8% compounded semi-
annually.
4. P50 000 deposited in a
bank every 3 months for 5
years that pays an interest
of 5% compounded semi-
annually.
5. Quarterly payments of P3
000 for 2 years with an
interest rate of 7.5%
compounded quarterly.
Read each problem carefully and
tell whether each of the given
information describes a simple annuity
or general annuity. Illustrate the cash
flow in time diagram
1. Annual payment of
P500 for 7 years with
an interest at 8%
compounded annually.
2. Monthly payment of P5 200
per quarter for 8 years
with an interest rate of 4%
compounded semi-
annually.
3. Semi-annual payments of
P450 for 12 years that pays
at 9% compounded semi-
annually.
4. P10 000 deposited in a
bank every 3 months for 7
years that pays an interest
of 6% compounded semi-
annually.
5. Quarterly payments of P7
000 for 7 years with an
interest rate of 7.5%
compounded quarterly.
6. Monthly payments of P1
000 for 6 years with an
interest rate of 7.6%
compounded quarterly.

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