Lessons 4 & 5
Future Value and Present
Value of Annuities
GROUP 2
Lesson 4
Future Value of Annuities
GROUP 2
Annuity
sequence of equal payments (or deposits)
made at a regular interval of time
Types of Annuities
Ordinary Annuity (annuity-immediate)
Payments that are deposited at the end of
every period
Annuity-due
Payments that are deposited at the beginning
of the period
Simple Annuity
Frequency of payments is the same as the
compounding period
What is Future
Value of Annuities?
The future value of an annuity is a way
of calculating how much money a series
of payments will be worth at a certain
point in the future.
Theorem 3.4.1
a. Ordinary Annuity
R = regular payments
i = interest rate
t = time (in years)
m = payments per t
(compound period)
b. Annuity-due
Future Value
How to identify:
Find the future value of an ordinary annuity with a
regular payment of ₱500 at 2% interest rate
compounded quarterly for 2 years.
R = regular payment ₱500 = 500
i = interest rate 2% = 0.02
t = time 2 years =2
m = payments per t quarterly =4
Future Value
Example:
a. Find the future value of an ordinary annuity with a regular
payment of ₱1,000 at 5% interest rate compounded quarterly
for 3 years.
R =?
i =?
t =?
m =?
Future Value
Example:
a. Find the future value of an ordinary annuity with a regular
payment of ₱1,000 at 5% interest rate compounded quarterly
for 3 years.
R = 1,000
i = 5% 0.05
t =3
m =4
Future Value
Example:
a. Find the future value of an ordinary annuity with a regular
payment of ₱1,000 at 5% interest rate compounded quarterly
for 3 years.
R = 1,000
i = 5% 0.05
t =3
m =4 A(3) = ₱12,860.36
Future Value
Example:
b. Find the future value of the annuity-due with a regular
payment of ₱1,500 at 4% interest rate compounded semi
annually for 2.5 years
R =?
i =?
t =?
m =?
Future Value
Example:
b. Find the future value of the annuity-due with a regular
payment of ₱1,500 at 4% interest rate compounded semi
annually for 2.5 years
R = 1,500
i = 4% 0.04
t = 2.5
m =2
Future Value
Example:
b. Find the future value of the annuity-due with a regular
payment of ₱1,500 at 4% interest rate compounded semi
annually for 2.5 years
R = 1,500
i = 4% 0.04
t = 2.5
m =2 A(2.5) = ₱7,962.18
Future Value
Word Problem:
Edith wants to buy an iPad as a gift for her friend. Therefore, she
deposited ₱2,000 at the beginning of each month in an account
crediting 2% annual interest rate compounded monthly. What is
the future value of the account at the end of 1 year and 3 months?
R =?
i =?
t =?
m =?
Future Value
Word Problem:
Edith wants to buy an iPad as a gift for her friend. Therefore, she
deposited ₱2,000 at the beginning of each month in an account
crediting 2% annual interest rate compounded monthly. What is
the future value of the account at the end of 1 year and 3 months?
R = 2,000 -1
i = 0.02
t = 1.25
m = 12
A(1.25) = ₱30,403.13
Future Value
Word Problem:
Mrs. Smith opened a savings account in a bank that credits 3%
interest rate. If Mrs. Smith deposits ₱3,000 into the savings
account at the end of every month for 5 years, how much is the
savings account worth after the last deposit?
R =?
i =?
t =?
m =?
Future Value
Word Problem:
Mrs. Smith opened a savings account in a bank that credits 3%
interest rate. If Mrs. Smith deposits ₱3,000 into the savings
account at the end of every month for 5 years, how much is the
savings account worth after the last deposit?
R = 3,000
i = 3% 0.03
t =5
m = 12 A(5) = ₱116,364.0827
Future Value
Lesson 5
Present Value of Annuities
GROUP 2
What is Present
Value of Annuities?
The present value of an annuity is the
single amount needed now to make
the payments (or deposits) in the
future.
What is Present
Value of Annuities?
The Present Value of Annuities is the
current worth of future annuity
payments based on a set rate of return,
also known as the discount rate.
THEOREM 3.5.1
a. Ordinary Annuity: R = regular payments
i = interest rate
t = time (in years)
m = payments per t
(compound period)
b. Annuity-Due:
Present Value
Example:
a. An ordinary annuity with regular quarterly payments worth
₱1,000 at 3% annual interest rate compounded quarterly at the
end of 4 years
R =?
i =?
t =?
m =?
Present Value
Example:
a. An ordinary annuity with regular quarterly payments worth
₱1,000 at 3% annual interest rate compounded quarterly at the
end of 4 years
R = 1,000
i = 3% 0.03
t =4
m =4
Present Value
Example:
a. An ordinary annuity with regular quarterly payments worth
₱1,000 at 3% annual interest rate compounded quarterly at the
end of 4 years
R = 1,000
i = 3% 0.03
t =4
m =4 P = ₱15,024.31
Present Value
Example:
b. An annuity-due with regular monthly payments worth
₱2,500 at a 6% annual interest rate compounded monthly at
the end of one and a half years.
R =?
i =?
t =?
m =?
Present Value
Example:
b. An annuity-due with regular monthly payments worth
₱2,500 at 6% annual interest rate compounded monthly at the
end of one and a half year.
R = 2,500
i = 6% 0.06
t = 1.5
m = 12
Present Value
Example:
b. An annuity-due with regular monthly payments worth
₱2,500 at 6% annual interest rate compounded monthly at the
end of one and a half year.
R = 2,500
i = 6% 0.06
t = 1.5
m = 12 P = ₱43,146.58
Present Value
Seatwork:
1. Anna plans to invest money that is sufficient enough to make withdrawals
of ₱20,000 at the beginning of each year for 10 years. If the account earns
7% compounded semiannually, how much money should Anna invest in
order to achieve her goal?
2. Mr. and Mrs. Kim opened a savings account for their daughter after she
was born. Their daughter Cassy, will gain access to the savings account
once she turns 18 years old. Mr. and Mrs. Kim agreed that they will
deposit money into the savings account separately, Mr. Kim deposits
₱3,000 at the end of every month and Mrs. Kim deposits ₱2,000
quarterly. If the bank credits a 5% interest rate, how much is the savings
account worth after 18 years? Individually, how much would Mr. and
Mrs. Kim have deposited into the account after the time period with the
added interest?
Seatwork:
3. Rodriguez is planning on having an annual gross income of
$50,000 at the end of every year when he retires at age 65. He is
planning for the account to be emptied by age 78, which is the
average life expectancy for a Canadian man. If the account earns
5.1% compounded annually, what amount of funds needs to be in
the account when he retires?
4. In preparation for an upcoming event, Yoah opens an account
credited an annual interest 1.5% compounded quarterly. If Yoah
put ₱7,000 in the account at the beginning of each period, how
much will he have after 1 year and 7 months?
