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Understanding Deferred Annuities and Calculations

The document explains deferred annuities and the period of deferral, providing formulas for calculating the present value (PV) and future value (FV) of such annuities. It includes examples of calculating the PV of deferred annuities with different payment schedules and interest rates. Additionally, it outlines how to determine the FV of deferred annuities based on specified contributions and deferral periods.

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5 views2 pages

Understanding Deferred Annuities and Calculations

The document explains deferred annuities and the period of deferral, providing formulas for calculating the present value (PV) and future value (FV) of such annuities. It includes examples of calculating the PV of deferred annuities with different payment schedules and interest rates. Additionally, it outlines how to determine the FV of deferred annuities based on specified contributions and deferral periods.

Uploaded by

realmereal050
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

Deferred Annuity - an annuity that does not begin until a given time interval has passed.

Period of Deferral - time between the purchase of an annuity and the start of the payments for the
deferred annuity.

Find the Period of Deferral:

1) Quarterly payments of P5, 000 for 8 years that will start two years from now.

2) Annual payments of P8, 000 for 12 years that will start 5 years from now.

3) Annual payments of P2, 500 for 24 years that will start 12 years from now.

Formula for PV of a deferred annuity:

[ ]
−(n+d ) −d
1−(1+ i) 1−(1+i)
PV =P −
i i

Example#1:

Mr. Sanchez borrowed money for the expansion of his business. He pays P2,000 semiannually for 5
years. How much was loaned if he started paying at the end of 3 years at 8% compounded
semiannually?

Given:

P=₱2,000.00

t=5
r=8%

8%
i= =0.04
2
d=5
K=2
n=5(2)=10

Example#2:

Find the present value of a deferred annuity of 1,500.00 every 3 months for 8 years that is deferred 3
years if money in worth 6% converted or compounded quarterly.

Given:

P= 1,500.00
r= 6%
K=4
6%
i= =0.015
4
t=8 years
n= 8(4) =32
d=3(4) = 12

To find the FV of a deferred annuity use the formula:


n
(1+i) −1
FV =P
i
Example1:

Juanito is saving for his retirement and plans to make semi-annual payments of ₱5,000 into an account
that earns 8% interest compounded semi-annually. He will defer his payments for 5 years before starting
to contribute. What will be the total amount in his account at the end of 15 years of making
contributions?

Given:

P= ₱5,000
r= 8%
8%
i= =0.04
2
K=2
t=15
n=15(2) =30

Example2:

A couple is saving for their child's college education. They plan to make quarterly payments of ₱10,000
into a savings account that earns 4% interest compounded quarterly. They will wait for 4 years before
starting to make these contributions. What will be the total amount in the account at the end of 18
years of making contributions?

P=10,000.00
r=4%
K=4
4%
i= =0.01
4
t=18
n=18(4)=72

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