DEFERRED ANNUITY

Business Mathematics
CHAPTER 6: DEFERRED
ANNUITY
Learning Competencies
• After completing this chapter, the learner will be able to:
• Define the key terms of simple deferred annuity.
• Distinguished and differentiate simple deferred annuity with ordinary simple
annuity and simple annuity due.
• Compute the terms in the simple deferred annuity such as present value,
periodic payment, length of the deferral period and term.
• Derive the formulas in a simple deferred annuity.
• Give examples of a simple deferred annuity problem in real-life situation.
CHAPTER 6: DEFERRED
ANNUITY
Chapter Outline
• Unit 6.1: Introduction to Deferred Annuity
• Unit 6.2: Computing the Future Value of a Simple Deferred Annuity
• Unit 6.3: Computing the Present Value of a Simple Deferred Annuity
• Unit 6.4: Computing the Periodic Payment of a Simple Deferred Annuity
• Unit 6.5: Computing the Length of the Deferral Period
• Unit 6.6: Computing the Term of a Deferred Annuity
 UNIT 6.1: Introduction to Deferred Annuity
A deferred annuity is an insurance contract that promises to pay the annuitant a
lump sum or a regular income at a later date. Deferred annuities are frequently
purchased to supplement Social Security benefits and other retirement income
streams. Deferred annuities allows us to make premium payments now and
receive the payout months, years, or decades later. A deferred annuity
accumulates value and earns interest, allowing us to receive a larger payout when
we begin withdrawing funds from it. We can buy deferred annuity with a single
lump sump payment or a series of payments spread out over time. Deferred
annuities allow our principal to grow before we begin receiving payments. When
the first payment interval of an annuity is delayed, or deferred, for a period it is
called deferred annuity.
UNIT 6.1: Introduction to Deferred Annuity

IN OTHER WORDSSSSSS

Deferred Annuity is the type of

annuity that does not begin until a
given time interval has passed.
 UNIT 6.1: Introduction to Deferred Annuity

Period of Deferral - time between

the purchase of an annuity and the
start of the payments for the
deferred annuity.
The following variables will be in our mathematical treatment of ordinary
simple annuity:
Sdef = Future value of a deferred annuity
Adef = Present value of a deferred annuity
R= Periodic payment of the deferred annuity
d = Number of compounding intervals during the period of deferral
j = Nominal interest rate
m = Number of conversions per year
t = Time period (term) of the loan or investment
n = Number of payments in the annuity
i = Periodic interest rate
DEFERRED ANNUITY
FORMULA
𝐴 𝑑𝑒𝑓 =
𝐴𝑛
𝑑
(1+𝑖)

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

{[ ]}
−𝑛
1 − (1+𝑖)
log 𝑅
𝐴 𝑑𝑒𝑓 𝑖
𝑑=
log ( 1+𝑖 )

[ ]
𝑑
𝐴 𝑑𝑒𝑓 𝑖(1+𝑖)
log 1 −
𝑅
𝑛=
− log ( 1+𝑖 )
UNIT 6.2: COMPUTING THE FUTURE VALUE
OF A SIMPLE DEFERRED ANNUITY

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

FUTURE VALUE 𝑆 𝑑𝑒𝑓 =𝑅

𝑖

Suppose Mrs. Remoto would like to save P3,000 at the end of each month, for six
months, in a fund that gives 9% compounded monthly. How much is the amount or
future value of her savings after 6 months?
R = 3000
i = j/m = .09/12
n = tm = .5(12) = 6
 [ ]
𝑑
(1+𝑖) −1

FUTURE VALUE 𝑆 𝑑𝑒𝑓 =𝑅

𝑖

In order to save for her high school graduation, Marie decided to save P200 at the end
of each month. If the bank pays 0.250% compounded monthly, how much will her
money be at the end of 6 years?
R = 200
i = j/m = .0025/12
n = tm = 6(12) = 72
 UNIT 6.3: COMPUTING THE PRESENT
VALUE OF A SIMPLE DEFERRED ANNUITY

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

PRESENT VALUE 𝐴 𝑑𝑒𝑓 = 𝑅

𝑖

Dwyane is setting up a fund to help finance his son's college education. He wants his
son to be able to withdraw P40,000 at the beginning of every three months for 2 years
starting in 6 years. If the fund can earn 8% compounded quarterly, what single amount
contributed today will provide for the payments?

R = 40000
i = j/m = .08/4 = 0.02
n = t1m = 2(4) = 8
d= t2m = 6(4)-1 = 23
 [ ]
−𝑑 −(𝑛+ 𝑑)
(1+𝑖) −(1+𝑖)

PRESENT VALUE 𝐴 𝑑𝑒𝑓 = 𝑅

𝑖

Find the present value of a man's pension of P13,000 payable monthly, the first due is
at the end of 1 year, and the last at the end of 5 years, if money is worth 6%
compounded monthly.

R = 13000
i = j/m = .06/12 = 0.005
n = t1m = 5(12) + 1 = 61
d= t2m = 12(1)-1 = 11
UNIT 6.4: COMPUTING THE PERIODIC
PAYMENT OF A SIMPLE DEFERRED
ANNUITY

𝐴 𝑑𝑒𝑓 𝑖
𝑅= −𝑑 −( 𝑛 +𝑑 )
(1+𝑖) −( 1+ 𝑖)
 𝐴 𝑑𝑒𝑓 𝑖

PERIODIC
𝑅= −𝑑 −( 𝑛 +𝑑 )
(1+𝑖) −( 1+ 𝑖)

PAYMENT
SJS Appliance Center is planning a promotion on a washing machine with a price of
P7,000. Buyers will pay "no money down and no payments for 6 months". The first of
12 equal monthly payments are required six months from the purchased date. What
should the monthly payment be if the store is to earn 18% compounded monthly on its
account receivable during both the deferral period and the repayment period?

Adef = 7000
i = j/m = .18/12
n = tm = 12
d = 6(1)-1 = 5
 𝐴 𝑑𝑒𝑓 𝑖

PERIODIC
𝑅= −𝑑 −( 𝑛 +𝑑 )
(1+𝑖) −( 1+ 𝑖)

PAYMENT
A man borrowed P24,000 from an SSS calamity loan interest at 12% compounded
monthly. At the end of 3 month, he made the first payment of 24 monthly payments
which fully discharged his debt. Find his monthly payment.

Adef = 24000
i = j/m = .12/12
n = tm = (2)12
d = 3(1)-1 = 2
UNIT 6.5: COMPUTING THE LENGTH OF
THE DEFERRAL PERIOD

{ [ ]}
−𝑛
1 − (1+𝑖)
log 𝑅
𝐴 𝑑𝑒𝑓 𝑖
𝑑=
log ( 1+𝑖 )
 {[ ]}
−𝑛
1 − (1+𝑖)
log 𝑅

DEFERRAL PERIOD
𝐴 𝑑𝑒𝑓 𝑖
𝑑=
log ( 1+𝑖 )

Scarlett purchased a deferred annuity from an insurance company for P17,385.57.

Based on earnings at the rate of 7% compounded quarterly, the annuity will make
quarterly payments of P2,100 for 3 years. If the first payment is to be received on
August 1, 2025, when did Scarlett purchase the deferred annuity?

R = 2100
Adef = 17385.57
i = j/m = .07/4
n = tm = 3(4) = 12
 {[ ]}
−𝑛
1 − (1+𝑖)
log 𝑅

DEFERRAL PERIOD
𝐴 𝑑𝑒𝑓 𝑖
𝑑=
log ( 1+𝑖 )

A finance company paid a merchant P55,000 for a conditional sale contract after
discounting it to yield 11% compounded quarterly. If the contract is for 8 quarterly
payments of P8,000 following a payment-free period, what is the time interval
between the date of sale and the first payment?

R = 8000
Adef = 55000
i = j/m = .11/4 = 0.0275
n = tm = (2)4 = 8
UNIT 6.6: COMPUTING THE TERM OF A
DEFERRED ANNUITY

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

TERM
𝑅
𝑛=
− log ( 1+𝑖 )

How long does an investment of P19,910 at 10% compounded semiannually support

semiannual withdrawals of P4,000 beginning five years later?

R = 4000
Adef = 19910
i = j/m = .10/2 = 0.05
d = 2(5)-1 = 9
 [ ]
𝑑
𝐴 𝑑𝑒𝑓 𝑖(1+𝑖)
log 1 −

TERM
𝑅
𝑛=
− log ( 1+𝑖 )

Mindshapers Publishing loaned P3.5 million to a subsidiary to build a printing press

in San Miguel, Bulacan. No payments are required for three years to allow the
operations to become well-established. The first bimonthly payment of P200,000 is
due four years from today. If the interest rate charged of the inter-company loan is
18% compounded bimonthly, how long (measured from the date of the first payment)
will it take the subsidiary to pay off the loan?

R = 200000
Adef = 3500000
i = j/m = .18/6 = 0.03
d = 6(1)-1 = 5