OBJECTIVES:

Define annuity payment

Understand different types of annuity
Solve simple and ordinary annuity problems

ANNUITY
It is the payment or receipt of equal
cash amounts per period for a specified
amount of time.

A sequence of payments made at equal

(fixed) intervals

ANNUITIES
According to
payment interval
and interest period

Simple Annuity

Complex or General
Annuity

According to time of
payment

Ordinary
Annuity

Annuity Due

Annuity Certain

Contingent Annuity

According to
duration

SIMPLE ANNUITY
are annuities in which the number of compounding
periods per year coincides with the number of annuity
payments per year.

COMPLEX OR GENERAL ANNUITY

are annuities in which the annuity payments and
compounding periods does not coincide.

ORDINARY ANNUITY
annuity that is paid or received at the end of
each time period.

ANNUITY DUE
annuity that is paid or received at the beginning
of each time period.

ANNUITY CERTAIN
are annuities that have a specified number
of time periods.

CONTINGENT ANNUITY
are annuities based on an uncertain time
period.

FUTURE VALUE OF AN ANNUITY

OR AMOUNT OF ANNUITY

The total amount of the annuity

payments at the accumulated
interest on those payments.

FUTURE VALUE OF AN ORDINARY ANNUITY

+
=

F = Future Value
i=

interest rate per period

n=

P = Annuity Payment

i=

total no. of conversion period = m x t

j = rate of interest
m = conversion period

FUTURE VALUE OF AN ANNUITY DUE

+
=
+

F = Future Value
i=

interest rate per period

n=

P = Annuity Payment

i=

total no. of conversion period = m x t

j = rate of interest
m = conversion period

FAR EASTERN UNIVERISTY

Senior High School

Illustration:

a. What is the future value of an ordinary annuity of $100 per month for
3 years at 6% interest compounded monthly?
b. What is the future value of this investment if it is an annuity due?

pmt $100
m 12
t 3 years
j 6%
.06
i
.005
12
n 3 12 36

(1 .005)36 1
a. FV $100

.
005

FV $3,933.61

(1 .005)36b 1
b. FV $100
( 1 .005 )

.005

FV $3,953.28

FAR EASTERN UNIVERISTY

Senior High School

Quick test:

1. If you pay 50 at the end of each month for 40 years on account

that pays interest at 10% compounded monthly, how much money do
you have after 40 years?

2. Mr. and Mrs. Garcia deposited 20,000 at the beginning of

each year for 5 years in an investment that earns 10 % per year
compounded annually. What is the future value of the annuity?

FAR EASTERN UNIVERISTY

Senior High School

James and Jomar are twins. After graduation and being finally able to get a good job,
they plan for retirement as follows:
Starting at the age of 24, James deposits 10,000 at the end of each year for 36
years.
Starting at the age of 42, Jomar deposits 20,000 at the end of each year for 18
years.
Who will have the greater amount at retirement if both annuities earn 12.5% per year
compounded annually?