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Annuity Due Payment Calculations

This document discusses annuity due and provides formulas and examples for calculating present value and amount of annuity due. It defines annuity due as payments made at the beginning of each period. Formulas are given for present value of annuity due (Á), amount of ordinary annuity (Ś), and periodic payment (R). Two sample problems apply the formulas to calculate present value, amount, and required periodic deposits for different annuity scenarios.

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Gian Luigi Katigbak
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9 views3 pages

Annuity Due Payment Calculations

This document discusses annuity due and provides formulas and examples for calculating present value and amount of annuity due. It defines annuity due as payments made at the beginning of each period. Formulas are given for present value of annuity due (Á), amount of ordinary annuity (Ś), and periodic payment (R). Two sample problems apply the formulas to calculate present value, amount, and required periodic deposits for different annuity scenarios.

Uploaded by

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

Module 5 Topic 1

Annuity Due – paid at the beginning of the payment interval. House rent is an example of
annuity due. It means that you pay the rental in advance before you use the space or the
house.

Terminologies
1. Present value of an annuity due – the value at the first payment date. Denoted by capital
letter A with a bar Á. This read as A bar
2. Amount of an ordinary annuity – its value one period after the last payment. Denoted by
capital letter S with a bar Ś. This is read as S bar.

Formula:
1−( 1+i )−n
Present value Á=R+ R ⌈ ⌉
i
Amount
(1+i )n−1
Ś=R ⌈ ⌉−R
i
Periodic payment of A bar
Á
R= −n
1−( 1+i )
1+
i
Periodic payment of S bar
Ś
R= n
( 1+ i ) −1
−1
i

Sample Problems
1. Find the present value and the annuity due amount pf P5,500 payable semi-annually for 9 ½
years. Money is worth 7% compounded semi-annually.
Given:
R = 5,500
j = 7%
m = semi-annual or 2
i = 7%/2 or 3.5% or .035
t = 9 ½ years or 9.5 years
n = t x m or 9.5 x 2 = 19

Find the present value

1−( 1+i )−n


Á=R+ R ⌈ ⌉
i
1−( 1+.035 )−19
Á=5,500+5,500 ⌈ ⌉
.035

1−( 1 .035 )−19


Á=5,500+5,500 ⌈ ⌉
.035

1−( .52015569 )
Á=5,500+5,500 ⌈ ⌉
.035

.479844309
Á=5,500+5,500 ⌈ ⌉
.035

Á=5,500+5,500 ⌈ 13.70983742⌉

Á=5,500+75,404.1058

Á=80,904.11

Find the amount of annuity due

(1+i )n−1
Ś=R ⌈ ⌉−R
i

(1+.035 )19−1
Ś=5,500 ⌈ ⌉−5,500
.035

(1 .035 )19−1
Ś=5,500 ⌈ ⌉ −5,50 0
.035

(1.922501317 )−1
Ś=5,500 ⌈ ⌉−5,50 0
.035

(.922501317 )
Ś=5,500 ⌈ ⌉−5,50 0
.035

Ś=5,500 ⌈ 26.3571805 ⌉−5,50 0

Ś=144,964.4927−5,50 0

Ś=139,464.49
2. How much must be deposited at the beginning of every 3 months in a fund giving 12%
compounded quarterly in order to have P300,000 in 5 years?
Given:
Ś = P300,000
j = 12%
m = quarterly or 4
i = 12%/4 or 3% or .03
t = 5 years
n = t x m or 5 x 4 = 20

How much must be deposited quarterly?


Ś
R= n
( 1+ i ) −1
−1
i

300,000
R=
( 1+ .03 )20−1
−1
.03

300,000
R=
( 1.03 )20−1
−1
.03

300,000
R=
( 1.806111235 )−1
−1
.03

300,000
R=
.806111235
−1
.03

300,000
R=
26.87037449−1

300,000
R=
25.87037449

R=11,164.71

Common questions

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The timing of payments in an annuity due can be more advantageous for certain financial goals because payments made at the beginning of the period accrue more interest compared to payments at the end. This additional compounding can result in higher accumulated values over time, making it more beneficial for goals requiring larger future sums or where higher growth rates are advantageous. Additionally, it provides immediate assurance of commitment to payments, which is helpful for budgeting purposes .

The compounding frequency impacts the value of an annuity due by affecting both the present value and future value calculations. More frequent compounding periods (e.g., semi-annual vs. annual) lead to a greater effect of the interest rate on the annuity's growth, resulting in higher future values and potentially larger present values depending on the compounding method used .

The future value (amount) of an annuity due is computed using the formula: ´S = R ⌈(1+i)n−1 / i⌉ − R. This calculation reflects the compounded growth of the payments made over time, capturing the value one period after the last payment. Its significance lies in understanding how much an initial series of payments will grow, reflecting the impact of interest rates compounding .

The present value of an annuity due is calculated using the formula: ´A = R + R⌈1−(1+i)−n / i⌉. This value represents the worth of all future payments in today's terms, assuming payments occur at the start of the period. This calculation considers the compounding effect due to timing differences .

The periodic payment of an ordinary annuity is typically less than that of an annuity due for the same future value. This difference arises because payments in an ordinary annuity are made at the end of each period, allowing for less compounding time compared to payments made at the start of each period in an annuity due, thereby requiring slightly higher payments for the same future value .

A change in the interest rate affects the amount needed to be deposited quarterly by altering the calculation of the periodic payments using R = ´S / (((1+i)n−1 / i)−1). An increase in the interest rate would generally decrease the amount required since the higher rate enhances the compounding effect, while a decrease would necessitate larger deposits for the same future value .

The main factors determining the periodic payment required in an annuity due to reach a target future value include the interest rate per period, the number of periods, and the target future value itself. These parameters are utilized in the calculation formula: R = ´S / ((1+i)n−1 / i)−1, ensuring the payments align with the desired future financial goal .

A real-world application of an annuity due is in rental payments for housing. Paying rent at the beginning of the period ensures that the landlord receives payment upfront, which can assist in financial planning and reduce the risk of missed payments. This arrangement benefits the landlord by providing cash flow assurance and benefits tenants by securing occupancy rights for the paid period .

An annuity due involves payments that occur at the beginning of each period, such as a house rent payment made in advance before using the space. In contrast, an ordinary annuity involves payments made at the end of each period. This distinction affects the calculation of present and future values since the timing of payments influences the compounding and discounting processes .

To calculate the present value of an annuity due of P5,500 payable semi-annually for 9.5 years with a 7% interest rate compounded semi-annually, first determine i as .035 (7%/2). Then calculate n as 19 (9.5 years × 2). Finally, compute ´A using the formula: ´A = 5,500 + 5,500⌈1−(1.035)−19/.035⌉, which results in a present value of P80,904.11 .

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