Chapter 3 Simple Annuity

3.3. Deferred Annuity

A deferred annuity refers to a series of payments that occurs regularly and
consecutively over a certain period of time. With a regular annuity, the payments
begin immediately at the end of the first period. In contrast, the payments of a
deferred annuity begin at the end of a later period.

The present value of a deferred annuity is the sum of all present values of
the periodic payment made after the period of deferment. While the amount of a
deferred annuity is the sum of all accumulated periodic payments made at the end
of the deferred period to the end of the term of the annuity.

In solving deferred annuity, we need to consider the rules in finding the

deferment period. To compute for the deferment period (d) follow the rules
below.

1. If the periodic payment is made on the succeeding year or deferment year is

known, then just multiply the deferment year by the conversion period (m)
Example:
The quarterly payment of the annuity is deferred for 2 years and 6
months.

Solving for deferment period (d) express 2 years and 6 months in years
which is equal to 2.5 years, then d = 2.5 × 4 = 10.

2. If the first periodic payment is due at the end of the deferment year/s, then
multiply the deferment year by conversion period minus 1.
Example:
The first monthly payment of an annuity is due at the end of 3 years and
5 months. Solving for the deferment period (d), consider the conversion
period (m) which is equals 12, then
d=n–1
d = mt -1
5
d = (3 12) × (12) − 1 = 40

3. If the specified time of the first and last periodic payment are unknown, then
follow the rules
a. Determine the difference between the specified number of years, the
last payment occurs and the first payment.

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b. Multiply time of the first payment by the conversion period minus 1,

this is equal to deferment period (d)
c. Multiply the result in rule (a) by m then add 1 to find total conversion
period (n).

Example

The first semi-annual periodic payment is due at the end of 4 years

and 6 months; its last payment is due at the end of 10 years.

a. Difference: 10 – 4.5 = 5.5 years

b. Deferred year: 4.5 d = 4.5 × 2 – 1 = 8
c. Total conversion period (n) n = 5.5 × 2 + 1 = 12

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Summary of Formula for Deferred Annuity

3.3.1. Finding Present Value (Pdef)

1 − (1 + i)−n
Pdef = R [ ] (1 + i)−d
i

j −mt
1−(1+ )
m j −d
Pdef = R [ j ] (1 + )
m
m

where: d – is the deferred period

n – is total conversion period

3.3.2. Finding the periodic payment (R) if the Present Values is known

Pdef
R def = 1−(1+i)−n
[ ] (1 + i)−d
i

Pdef
R def = j −mt
1−(1+m) j −d
[ j ] (1 + )
m
m

3.3.3. Finding the time (t) and number of periods (n) if the present value is known.
(Pdef )(i)
−log [1 − ]
R(1+i)−d
n=
log(1 + i)

j
(Pdef )( )
m
−log [1 − ]
j −d
R(1+m)
n= j
log (1 + )
m

n
t=
m
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3.3.4. Finding the amount of a deferred annuity (Fdef)

The formula is the same as the formula of the amount of ordinary annuity (Ford)

j mt
R[(1 + i)n − 1] R [(1 + ) − 1]
m
Fdef = Ford = = j
i
m

Example 1

Determine the present value of deferred annuity of P900 every three months for 4
years and 9 months that is deferred for 2 years, if money is worth 8½% converted
quarterly.
Given: R = P900
t = 4 years & 9 months = 4.75 years
deferment year = 2 years
j = 8½% = 0.085
m=4

Required: Present value (Pdef)

Solution:
Calculate first the values of d.

d=2×4–1=7
n = 4 × 4.75 = 19
Finding the present value of deferred annuity (Pdef)

1 − (1 + i)−n
Pdef = R [ ] (1 + i)−d
i

.085 −4×4.75
1−(1+
4
) .085 −7
Pdef = 900 [ .085 ] (1 + )
4
4

Pdef = 𝐏𝟏𝟐, 𝟎𝟒𝟎. 𝟎𝟑

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Example 2

Ashlene is 20 years old and wants to retire when she is 55 years old. She
wants to find today’s value of an annuity if he have deposited P21,000 twice a year
into super annuation account earning 6% compounded semi-annually. The first
payment occurs on her 25th birthday. Ashlene decides that she would rather not
start making deposits right now but will wait until she is 25 and then begin making
the P21,000 payments twice a year.

Given: R = P21,000
j = 6%
m=2
First payment = 25th birthday
Last payment = on his 55 the birthday.

Required: Present value (Pdef)

Solution:

Finding d and n

Difference: 55 – 25 = 30 years
Deferred time 25 – 20 = 5 years

d=5×2–1=9
n = 2 × 30 + 1 = 61

Solving for the present value of deferred annuity (Pdef)

1 − (1 + i)−n
Pdef = R [ ] (1 + i)−d
i

.06 −61
1−(1+
2
) .06 −9
Pdef = 21,000 [ .06 ] (1 + )
2
2

Pdef = 𝐏𝟒𝟒𝟖, 𝟎𝟖𝟑. 𝟓𝟔

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Example 3

Andre, a computer programmer wizard decides that he would like the present value
of his first home owner’s savings account to be worth P750,000. If Andre is
currently 20 and also believes that he may need more time to save for his first home,
so he doesn’t plan to purchase a house until he is 30. Andre also decides to start
making regular payments at 21. How much will Andre need to deposit each period,
if he makes 4 payments a year and the interest rate is 9% compounded quarterly?

Given: Pdef = P750,000

j = 9%
m=4
Time of the First saving deposit = he is 21 years
Time of the last saving deposit = 30 years
Present age of Andre is 20 years old

Required: Amount of deposit every 3 months (R)

Solution:

Finding d and n

Difference: 30 – 21 = 9 years
Deferred year = 21 – 20 = 1 year

d=1×4–1=3
n = 4× 9 + 1 = 37
Calculate for the payment R
Pdef
R def = 1−(1+i)−n
[ ] (1 + i)−d
i

Pdef
R def = j −mt
1−(1+m) j −d
[ j ] (1 + )
m
m

750,000
R def = .09 −37
1−(1+ 4 ) .09 −3
[ .09 ] (1 + )
4
4

R def = 𝐏𝟑𝟐, 𝟏𝟓𝟔. 𝟐𝟒

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Exercises 3.3
Name :_______________________________ Professor : ______________________
Course :_______________________________ Score : ______________________
Day & Time :_______________________________ Date : ______________________

Deferred Annuity

1. On January 1, 2009, Roma Legaspi opens an investment account. If an annuity

such that twelve annual payments equal to P20, 000 are made starting December
31, 2009 is going to be credited to her account, find the account balance on
December31, 2024. Assume that j=5% compounded annually and no
withdrawal will be made.

2. Today is January 1, 2010. An annuity pays P3, 500 at the end of every three
months. The first payment is scheduled for March31, 2011 and the last payment
1
for December 31, 2016. Determine the present value, if money is worth 105%
compounded quarterly.

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3. How much Beth Ocampo need to deposit today into an account that pays 3%
per year so that she can make 10 equal annual withdrawals of P42, 000, with
the first withdrawal being made seven years from now?

4. Fenny Suyat got a deal for you! If you lend me P1,000,000 today, I promise to
pay you back in twenty-five annual installments of P50,000, 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? Explain your
answer.

5. Gene wants to determine the future value of a 3- year contract, that pays
P100,000 each year and the first payment is deferred until the end of the 2
period. Interest rate is 7.5% compounded annually.

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