50 views

Uploaded by Pamela Mcmahon

annuity description and sample problem

- CHAPTER 6
- Exam2-Spring2011
- MATHEMATICS OF FINANCE.pptx
- Corporate Finance Lecture 3,4,5_Chapter 6
- Time Value of Money_final
- Sm Appendix b
- Practice Problems
- Financial Accounting
- 11_HPW-13-ISM-05.pdf
- Chapter 4
- Harrington Mar 2012
- FM Version 1.0
- Solutions for Investment Science
- annuity.docx
- Blank Exams
- sfm case
- Loans and Receivables - Long Term
- Bond Pricing and Analysis
- Auditing Problems Liabilities Ac42
- Annuity Due

You are on page 1of 8

deposits to a savings account, monthly home mortgage payments, monthly insurance payments

and pension payments. Annuities are classified by the frequency of payment dates. The payments

(deposits) may be made weekly, monthly, quarterly, yearly, or at any other interval of time.

An annuity which provides for payments for the remainder of a person's lifetime is a life annuity.

Contents

[hide]

1 Types

o 1.1 Timing of payments

o 1.2 Contingency of payments

o 1.3 Variability of payments

o 1.4 Deferral of payments

2 Valuation

o 2.1 Annuity-certain

2.1.1 Annuity-immediate

2.1.2 Annuity-due

2.1.3 Perpetuity

3 Amortization calculations

4 Example calculations

5 Legal regimes

6 See also

7 References

Types[edit]

Annuities may be classified in several ways.

Timing of payments[edit]

Payments of an annuity-immediate are made at the end of payment periods, so that interest

accrues between the issue of the annuity and the first payment. Payments of an annuity-due are

made at the beginning of payment periods, so a payment is made immediately on issue.

Contingency of payments[edit]

Annuities which provide payments which will be paid over a period of time known in advance

are annuities certain or guaranteed annuities. Annuities paid only under certain circumstances

are contingent annuities. A common example is a life annuity, which is paid over the remaining

lifetime of the annuitant. Certain and life annuities are guaranteed to be paid for a number of

years, and then become contingent on the annuitant being alive.

Variability of payments[edit]

Fixed annuities These are annuities with fixed payments. The insurance company

guarantees a fixed return on the initial investment. Fixed annuities are not regulated by

the Securities and Exchange Commission.

Variable annuities Registered products that are regulated by the SEC in the United

States of America. They allow direct investment into various funds that are specially

created for Variable annuities. Typically the insurance company guarantees a certain

death benefit or lifetime withdrawal benefits.

minimum payment will be 0% and the maximum will be predetermined. The performance

of an index determines whether the minimum, the maximum or something in between is

credited to the customer.

Deferral of payments[edit]

An annuity which begins payments only after a period of time is a deferred annuity. An annuity

which begins payments without a deferral period is an immediate annuity.

Valuation[edit]

Valuation of an annuity entails calculation of the present value of the future annuity payments.

The valuation of an annuity entails concepts such as time value of money, interest rate, and

future value.[1]

Annuity-certain[edit]

If the number of payments is known in advance, the annuity is an annuity certain or guaranteed

annuity. Valuation of annuities certain may be calculated using formulas depending on the timing

of payments.

Annuity-immediate[edit]

If the payments are made at the end of the time periods, so that interest is accumulated before the

payment, the annuity is called an annuity-immediate, or ordinary annuity. Mortgage payments

are annuity-immediate, interest is earned before being paid.

...

...

payments

periods

The present value of an annuity is the value of a stream of payments, discounted by the interest

rate to account for the fact that payments are being made at various moments in the future. The

present value is given in actuarial notation by:

where is the number of terms and is the per period interest rate. Present value is linear in the

amount of payments, therefore the present value for payments, or rent is:

In practice, often loans are stated per annum while interest is compounded and payments are

made monthly. In this case, the interest is stated as a nominal interest rate, and

The future value of an annuity is the accumulated amount, including payments and interest, of a

stream of payments made to an interest-bearing account. For an annuity-immediate, it is the

value immediately after the n-th payment. The future value is given by:

where is the number of terms and is the per period interest rate. Future value is linear in the

amount of payments, therefore the future value for payments, or rent is:

Example: The present value of a 5-year annuity with nominal annual interest rate 12% and

monthly payments of $100 is:

The rent is understood as either the amount paid at the end of each period in return for an amount

PV borrowed at time zero, the principal of the loan, or the amount paid out by an interest-bearing

account at the end of each period when the amount PV is invested at time zero, and the account

becomes zero with the n-th withdrawal.

Future and present values are related as:

and

To calculate present value, the k-th payment must be discounted to the present by dividing by the

interest, compounded by k terms. Hence the contribution of the k-th payment R would be R/

(1+i)^k. Just considering R to be one, then:

Similarly, we can prove the formula for the future value. The payment made at the end of the last

year would accumulate no interest and the payment made at the end of the first year would

accumulate interest for a total of (n1) years. Therefore,

Annuity-due[edit]

An annuity-due is an annuity whose payments are made at the beginning of each period.[2]

Deposits in savings, rent or lease payments, and insurance premiums are examples of annuities

due.

...

...

n-1

payments

periods

Each annuity payment is allowed to compound for one extra period. Thus, the present and future

values of an annuity-due can be calculated through the formula:

and

where are the number of terms, is the per term interest rate, and is the effective rate of

discount given by

Future and present values for annuities due are related as:

and

Example: The final value of a 7-year annuity-due with nominal annual interest rate 9% and

monthly payments of $100:

Note that in Excel, the PV and FV functions take on optional fifth argument which selects from

annuity-immediate or annuity-due.

An annuity-due with n payments is the sum of one annuity payment now and an ordinary annuity

with one payment less, and also equal, with a time shift, to an ordinary annuity. Thus we have:

(value at the time of the first of n payments of 1)

(value one period after the time of the last of n

payments of 1)

Perpetuity[edit]

A perpetuity is an annuity for which the payments continue forever. Since:

even a perpetuity has a finite present value when there is a non-zero discount rate. The formula

for a perpetuity are:

Life annuities[edit]

Valuation of life annuities may be performed by calculating the actuarial present value of the

future life contingent payments. Life tables are used to calculate the probability that the annuitant

lives to each future payment period. Valuation of life annuities also depends on the timing of

payments just as with annuities certain, however life annuities may not be calculated with similar

formulas because actuarial present value accounts for the probability of death at each age.

Amortization calculations[edit]

If an annuity is for repaying a debt P with interest, the amount owed after n payments is:

coupon

, and putting

Also, this can be thought of as the present value of the remaining payments:

Example calculations[edit]

Formula for Finding the Periodic payment(R), Given A:

R = A/(1+(1-(1+((j/m) )^(-(n-1))/(j/m))

Examples:

1. Find the periodic payment of an annuity due of $70000, payable annually for 3 years at

15% compounded annually.

o R = 70000/(1+(1-(1+((.15)/1) )^(-(3-1))/((.15)/1))

o R = 70000/2.625708885

o R = $26659.46724

2. Find the periodic payment of an annuity due of $250700, payable quarterly for 8 years at

5% compounded quarterly.

o R= 250700/(1+(1-(1+((.05)/4) )^(-(32-1))/((.05)/4))

o R = 250700/26.5692901

o R = $9435.71

Finding the Periodic Payment(R), Given S:

R = S\,/((((1+(j/m) )^(n+1)-1)/(j/m)-1)

Examples:

1. Find the periodic payment of an accumulated value of $55000, payable monthly for 3

years at 15% compounded monthly.

o R=55000/((((1+((.15)/12) )^(36+1)-1)/((.15)/12)-1)

o R = 55000/45.67944932

o R = $1204.04

2. Find the periodic payment of an accumulated value of $1600000, payable annually for 3

years at 9% compounded annually.

o R=1600000/((((1+((.09)/1) )^(3+1)-1)/((.09)/1)-1)

o R = 1600000/3.573129

o R = $447786.80

- CHAPTER 6Uploaded byrachim04
- Exam2-Spring2011Uploaded byRandall McVay
- MATHEMATICS OF FINANCE.pptxUploaded byFerrolinoLouie
- Corporate Finance Lecture 3,4,5_Chapter 6Uploaded byNotesfreeBook
- Time Value of Money_finalUploaded byMohammad Tamzid Siddique
- Sm Appendix bUploaded bydesireeren
- Practice ProblemsUploaded byShweta Singh
- Financial AccountingUploaded byrt2222
- 11_HPW-13-ISM-05.pdfUploaded by蔥蔥
- Chapter 4Uploaded byrossana1211
- Harrington Mar 2012Uploaded byPetro Petropoulos
- FM Version 1.0Uploaded byShoaib Khan
- Solutions for Investment ScienceUploaded byMartinQian
- annuity.docxUploaded byaliraza4255
- Blank ExamsUploaded byAndros Mafraugarte
- sfm caseUploaded bydht6885
- Loans and Receivables - Long TermUploaded byAleezaAngelaSanchezNarvadez
- Bond Pricing and AnalysisUploaded byHimanshu Joshi
- Auditing Problems Liabilities Ac42Uploaded byTrek Apostol
- Annuity DueUploaded bydame wayne
- %282012-S2%29 - FINS1613 - Tutorial Slides - Week 03 - Additional SlidesUploaded bySophia Miyamori
- Presentation1.pptxUploaded byanbarsonchetty
- P5 Formulae SheetUploaded byDlamini Sicelo
- Tutorial 2Uploaded bymarvinali
- Time value of moneyUploaded byMaureen Kaye Flores
- TMV and Its ImportanceUploaded byNikhil Upadhye
- Chapter 4Uploaded byyones
- Chap006 CalculatorsUploaded bywinbi
- ECON1Uploaded byDayLe Ferrer Abapo
- Unit 1 Introduction to Financial ManagementUploaded byPRIYA KUMARI

- EphemerisUploaded byPamela Mcmahon
- Sci MathUploaded byPamela Mcmahon
- StdsUploaded byPamela Mcmahon
- FeedbackUploaded byPamela Mcmahon
- AssignmentUploaded byPamela Mcmahon
- DerivationUploaded byPamela Mcmahon
- Communications NetworkUploaded byPamela Mcmahon
- AM FM Interview QuestionsUploaded byPamela Mcmahon
- Finding DoryUploaded byPamela Mcmahon
- Link Block DiagramUploaded byPamela Mcmahon
- HistoryUploaded byPamela Mcmahon
- Measuring RadiationUploaded byPamela Mcmahon
- Subic Telecom vs SBMAUploaded byPamela Mcmahon
- Biot Savart LawUploaded byPamela Mcmahon
- Sample for Project Study.reviSEDUploaded byFranz Albina
- Contract as per Civil Code of the PhilUploaded byPamela Mcmahon
- temperature devicesUploaded byPamela Mcmahon
- 16002 Ae Internship PhilippinesUploaded byPamela Mcmahon
- Jacob the GreatUploaded bySecu Ramona
- Pid ControllerUploaded byPamela Mcmahon

- RubcoUploaded byJason William George
- Ip-ecole de Cuisine Manille Case-digestedUploaded byGenevieve Tersol
- 7 & 11 Fundraising StrategyUploaded byoxade21
- All about interest rates in indiaUploaded byNitinAggarwal
- www-nirma-co-inUploaded bysai_kiran1987
- Exercise 15 Mass Properties CalculationsUploaded byvishal kumar sinha
- Paschimanchal Vidyut Vitran Nigam LtdUploaded byShivam Sharma
- SNF Consolidated Billing - Q & AUploaded byKarna Palanivelu
- Proch v. U.S. Bureau of Prisons, 10th Cir. (2016)Uploaded byScribd Government Docs
- American Airlines Mission StatementUploaded bycanoqwarline
- Tolerances, Limits, Fits and Surface FinishUploaded byRap itttt
- H-DVD5000Uploaded byzucpaol421
- Research Project Assignment 5(3)Uploaded byChooi Sin
- 04 Icp310 SAP AFS PricingUploaded bytsoh
- Eogui ManualUploaded byAbhinav Gupta
- ABB-Breaking Up to 90 KAUploaded byahmedrizwanchamp
- Notice: Proposed Withdrawal and Transfer of Jurisdiction; WyomingUploaded byJustia.com
- Oracle Fusion Apps JDeveloper SetupUploaded byGyan Darpan
- Airplane Upset Recovery by AirbusUploaded byMarcelo Marcusso
- ACC3dUploaded byCapacitacion Topografica
- Roller Compactor Basic Principles and Applications in PharmaceuticalsUploaded byTareq Tareq
- AESCULAP_INSTRUMENTS.pdfUploaded byTeye Onti
- OPC 20 Automation InterfaceUploaded byRaiany Cavedini Rodolfo Cavedini
- A Complete Guide About Solar Panel InstallationUploaded byJoel Remegio
- STEAM TRAPS OKUploaded byiran1362
- Infosys White Paper on RFID Architecture StrategyUploaded byapi-3737896
- Tunnel Depth - Def ModulusUploaded bygaddargaddar
- 01. IntroductionOverview of Data MiningUploaded byFebrian Arsy
- The General Packet Radio SystemUploaded bySamarth Jain
- Job opportunities at UoHUploaded byVenkat