LEADER: Sanchez, Gian

MEMBERS:

Camposano, Jarmae Marfil, Arnold Balansay, Veejay

Lazaro, Nina Marie Samson, Mikko

TLA 8.4 Sample Problems on Types of Annuities - Types of Annuity Group No. 6

I. Ordinary Annuity

1. Ms. Smith buys a car costing $20300. She agrees to make payments at the end of each monthly period for 6

years. She pays 9.65% interest compounded monthly. What is the amount of each payment? Find the total

amount of interest Ms. Smith will pay.

2. If the $200,000 loan in the previous problem is financed over 15 years at 10%, (a) what will the monthly

payment be? (b) What is the total amount of interest that should be pay.

3. Find the present value of an ordinary annuity which has deposits of $10279 semi-annually for 5 years at 7.6%

compounded semi-annually.

4. A manufacturing company wishes to give each 80 employees a holiday bonus. How much is needed to invest

monthly for a year at 12% nominal rate compounded monthly so that each employee will receive P2,000 bonus.

If payments are made at the end of each period?

5. A woman paid 10% down payment of Php200,000 for a house and lot and agreed to pay the remaining balance

on monthly installments for 60 months at an interest rate of 15% compounded monthly. Compute the amount

of the monthly payment

II. Annuity due

1. Suppose for an annuity due, you want to have $30,000 in the bank after 20 years. Assuming you make deposits

at the beginning of each year at an interest rate of 4%, how much would you have to deposit at the start of each

year assuming each deposit is the same amount?

2. Suppose you want to save money for your child’s college expenses and you deposit $1000 at the beginning of

each mid-year, for 18 years, at an interest rate of 5%. How much is available for your child when he/she starts

school?

3. I will invest $500 per quarter for my retirement at 7.3% compounding quarterly for 32 years. I have a choice of

making that payment of $500 at the beginning or the end of the quarter (annuity due). In which account will I

have more money and by how much? Which account will earn the most interest and by how much?

4. A manufacturing company wishes to give each 80 employees a holiday bonus. How much is needed to invest

monthly for a year at 12% nominal rate compounded monthly so that each employee will receive P2,000 bonus.

If payments are made at the beginning of each period?

5. The Trust Worthy loan company is willing to lend you $10,000 today if you promise to repay the loan in six

monthly payments of $2,000 each, beginning today. What is the effective annual interest rate on Trust Worthy's

loan terms
III. Deferred annuity

1. Determine the present worth of a deferred annuity, consisting of 10 semi-annual payments, each P1000, the

first at the end of the third year. Money is worth 14% compounded semi-annually.

2. Suppose you initiate a deposit from your employer, of say, $300 a month into an account starting at age 40 until

you retire, at say, age 65. Suppose the interest rate is 3% compounded monthly. What will the value of the

annuity be at the end of the 25 years?

3. A man P187400 from a bank with interest at 5% compounded annually. He agrees to pay his obligations by

paying 8 equal annual payments, the first being due at the end of 10 years. Find the annual payments.

4. Have I got a deal for you! If you lend me $100,000 today, I promise to pay you back in twenty-five annual

installments of $5,000, starting five years from today (that is, my first payment to you is five years from today).

You can earn 6% on your investments. Will you lend me the money?

5. Carol Calc plans on retiring on her 60th birthday. She wants to put the same amount of funds aside each year for

the next twenty years -- starting next year -- so that she will be able to withdraw $50,000 per year for twenty

years once she retires, with the first withdrawal on her 61st birthday. Carol is 20 years old today. How much

must she set aside each year for her retirement if she can earn 10% on her funds?
Solutions:

I. Ordinary Annuity

1. 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑆𝑖𝑑𝑒:

𝑃 = 20300; 𝐴 =? ; 𝑚𝐴 = 12; 𝑛 = 6

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒:

𝑟 = 0.0965; 𝑚 = 12; 𝑛 = 6
𝑟 (−𝑚𝑛)
[1−(1+ ) ]
𝑚
𝑃 = 𝐴{ 𝑚 }
𝑟 𝑚𝐴
[(1+ ) −1]
𝑚
𝑚
𝑟 𝑚𝐴
𝑃 [(1 + ) − 1]
𝑚
𝐴=
𝑟 (−𝑚𝑛)
[1 − (1 + ) ]
𝑚
12
0.0965 12
20300 [(1 + ) − 1]
12
𝐴= (−12)(6)
0.0965
[1 − (1 + ) ]
12
163.24583
𝐴=
0.43824

𝐴 = $372.50 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 = 𝑇𝑜𝑡𝑎𝑙 𝑀𝑠. 𝑆𝑚𝑖𝑡ℎ 𝑝𝑎𝑖𝑑 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑎𝑟

= 𝐴(𝑚)(𝑡) − $20300

= 372.50(12)(6)

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 = 26820 − 20300

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 = $6520.00

𝐴
2. 𝑃 = [1 − (1 + 𝑖)−𝑛𝐴 ]
𝑖

𝐺𝑖𝑣𝑒𝑛: 𝑃 = $20000, 𝑚 = 12, 𝑡 = 15 𝑦𝑒𝑎𝑟𝑠, 𝑟 = 10% 𝑜𝑟 0.10

𝑟 0.10
𝑖= = = 0.0083333
𝑚 12

𝑛𝐴 = 𝑚 × 𝑡 = 12 × 15 = 180
𝐴
20000 = [1−(1 + 0.0083333)−180 ]
0.0083333

20000(0.0083333) = 𝐴[1−(1.0083333)−180 ]

1666.66 = 𝐴[0.775477]
1666.66
𝐴=
0.775477

𝐴 = $2,149.21 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 = 𝑇𝑜𝑡𝑎𝑙 𝑝𝑎𝑖𝑑 − 𝐿𝑜𝑎𝑛

= 𝐴(𝑚)(𝑡) − 20000

= 2,149.21(12)(15) − 200000

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 = 36857.80 − 20000

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 = $186,857.80

3. 𝑃 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 = ?
𝑅 = 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 10279
𝑡 = 𝑡𝑖𝑚𝑒 (𝑖𝑛 𝑦𝑒𝑎𝑟𝑠) = 5
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 = 0.076
𝑚 = # 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑𝑠/ 𝑦𝑟 = 2
𝑖 = 𝑟/𝑚 = 0.038
𝑛 = 𝑚𝑡 = 10
[1−(1+𝑖)−𝑛 ]
𝑃=𝑅
𝑖
[1−(1 + 0.038)−10 ]
𝑃 = 10279
0.038
𝑃 = 10279[8.192256]

P= $84,208.20

4. 𝑁𝑅 = 0.12𝐹 = 𝑃2,000 ∗ 80𝑛 = 12

𝑚 = 12𝑃 = 𝑃160,000 𝐴 =?
0.12 (1∗12)
(1 + ) − 1)
𝑃160,000 = 𝐴 ( 12 )
0.12
( )
12

𝐴 = 𝑃12,625.00
5. Cost of house = 200,000/0.10
= Php2,000,000
Balance = Php1,800,000
P = 1,800,000 n = 60 months
I = 15% A=?
(1+𝑖)𝑛 −1
P = A*
(1+𝑖)𝑛 𝑖
(1+0.15)60 −1
1,800,000 = A* 𝐴 = 𝑃ℎ𝑝42,821.87
(1+0.15)60 (0.15)
II. Annuity Due

1. 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑆𝑖𝑑𝑒:

𝐹 = 30000; 𝐴 =? ; 𝑚𝐴 =1; n=20

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒:

𝑟 = 0.04; 𝑚 = 1; 𝑛 = 20
𝑚
𝑟 (𝑚𝑛+𝑚𝐴)
[(1 + ) − 1]
𝑚
𝐹=𝐴 𝑚 −1
𝑟 𝑚𝐴
[(1 + ) − 1]
{ 𝑚 }
𝐹
𝐴= 𝑚
𝑟 (𝑚𝑛+𝑚𝐴)
[(1 + ) − 1]
𝑚
𝑚 −1
𝑟 𝑚𝐴
[(1 + ) − 1]
{ 𝑚 }
30000
𝐴= 1
0.04 (1)(20)+1
[(1 + ) − 1]
1
1 −1
0.04 1
[(1 + ) − 1]
{ 1 }
30000
𝐴=
30.9692

𝐴 = $968.70

(1+𝑖)𝑛𝐴 −1
2. 𝐹=𝐴 [ ] (1 + 𝑖) 𝑊ℎ𝑒𝑟𝑒 𝐹 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑊𝑜𝑟𝑡ℎ, 𝐴 = 𝑒𝑞𝑢𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
𝑖

𝑛𝐴 = 𝑡𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑝𝑒𝑟𝑖𝑜𝑑, 𝑖 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

𝐺𝑖𝑣𝑒𝑛: 𝐴 = $1000, 𝑚 = 2, 𝑡 = 18 𝑦𝑒𝑎𝑟𝑠, 𝑟 = 5% 𝑜𝑟 0.05

𝑟 0.05
𝑖= = = 0.025
𝑚 2

𝑛𝐴 = 𝑚 × 𝑡 = 2 × 18 = 36
(1+0.025)36 −1
𝐹 = 1000 [ ] (1 + 0.025) ]
0.025

𝐹 = 1000 (57.301412)(1 + 0.025) ]

𝐹 = $58, 733.95
 [1−(1+𝑖)−𝑛 ]
3. 𝑃 = 𝑅{ − 𝑅}
𝑖
0.073 4(32)+1
[(1 + ) − 1]
4
𝑃 = 500 − 500
0.073
4
{ }

P = $254543.36

4. 𝑁𝑅 = 0.12𝐹 = 𝑃2,000 ∗ 80𝑛 = 12

𝑚 = 12 𝑃 = 𝑃160,000 𝐴 =?
0.12 1∗12
(1 + ) −1
160,000 = 𝐴 ( 12 )+𝐴
0.12
12

𝐴 = 𝑃11,694.00
5. Use the present value of an annuity due to approach this problem (because the first payment is today).
PV = $10,000
CF = $2,000
N=6
PV annuity due = CF (PV annuity factor for N=6, i=?)(1 + i)
$10,000 = $2,000 (PV annuity factor for N=6, i=?)(1 + i)
5 = (PV annuity factor for N=6, i=?)(1 + i)
Through trial error using the tables for N=6 such that the factor multiplied by 1+i is equal to 5,
i = 8%
precise answer for i= 7.9308%
EAR = (1 + 0.079308)12 - 1 = 149.89%
You can use the ordinary annuity approach, modifying the PV and N:
PV = $8,000
CF = $2,000
N=5
Solve for i for an ordinary annuity:
PV = CF (PV annuity factor for N=5, i = ?)
$8,000 = $2,000 (PV annuity factor for N=5, i = ?)
4.000 = PV annuity factor
Using the tables, i = 8% (factor is 3.9927)
Using a calculator, i = 7.9308%
III. Deferred Annuity

1. 𝑛 = 10 𝑠𝑒𝑚𝑖 − 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠; 𝐴 = 1000; 𝑘 = 3𝑟𝑑 𝑦𝑒𝑎𝑟; 𝑟 = 14%; 𝑚 = 2

𝑟 0.14
𝑖= = = 0.07
𝑚 2
1 − (1 + 0.07)−10
𝑃 = 1000 [ ] (1 + 0.07)−5
0.07

𝑃 = 𝑃5007.72
(1+𝑖)𝑛𝐴 −1
2. 𝐹=𝐴 [ ] 𝑊ℎ𝑒𝑟𝑒 𝐹 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑊𝑜𝑟𝑡ℎ, 𝐴 = 𝑒𝑞𝑢𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
𝑖

𝑛𝐴 = 𝑡𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑝𝑒𝑟𝑖𝑜𝑑, 𝑖 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

𝐺𝑖𝑣𝑒𝑛: 𝐴 = $300, 𝑚 = 12, 𝑡 = 25 𝑦𝑒𝑎𝑟𝑠, 𝑟 = 3% 𝑜𝑟 0.03

𝑟 0.03
𝑖= = = 0.0025
𝑚 12

𝑛𝐴 = 𝑚 × 𝑡 = 12 × 25 = 300
(1+0.0025)300 −1
𝐹 = 300 [ ]
0.0025

𝐹 = 300 (446.007823)

𝐹 = $133, 802.35

3. Given:

P= 187400

I= 5%

n= 8 years

k= 10

A=?
1 − (1 + 0.05)−8
187400 = 𝐴 [ ] (1 + 0.05)−9
0.05

𝑨 = 𝟒𝟒𝟗𝟖𝟎. 𝟓𝟔
4. CF = $5,000

N = 25

i = 6%

PV4 = $5,000 (PV annuity factor for N=25 and i=6%)

PV4 = $5,000 (12.7834)

PV4 = $63,916.78

PV0 = $63,916.78 / (1 + 0.06)4 = $50,628.08

5. PV60 = $50,000 (PV annuity factor for N=20, i=10%)

PV60 = $50,000 (8.5136)

PV60 = $425,678.19

Because she will stop making payments on her 40th birthday (first is on her 21st birthday, last is on her 40th

birthday), we must calculate the balance in the account on her 40th birthday:

PV40 = PV60 / (1 + 0.10)20 = $63,274.35

Then, we need to calculate the deposits necessary to reach the goal:

FV40 = PV40 = $63,274.35

N = 20

i = 10%

FV = CF (FV annuity factor for N=20, i=10%)

$63,274.35 = CF (FV annuity factor for N=20, i=10%)

$63,274.35 = CF (57.2750)

CF =payment = $1,104.75 per year

References:
https://www.youtube.com/watch?v=joBu9TnFngQ

https://www.youtube.com/watch?v=_7g1ofVz9XA

https://www.youtube.com/watch?v=pK3fSKQXdnQ

https://www.youtube.com/watch?v=3udtaCfNDCQ

https://www.youtube.com/watch?v=joBu9TnFngQ&t=44s

https://www.youtube.com/watch?v=Hkk3-6dn1Ec

http://educ.jmu.edu/~drakepp/principles/module3/defprobs.htm

http://www.msubillings.edu/cotfaculty/pierce/classes/M108/Ch10colored11th.pdf

https://cnx.org/contents/[email protected]:t2OwXSFN@1/Mathematics-of-Finance-Homework