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An annuity is a series of equal payments at regular intervals.

Examples of annuities are regular

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.


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 Proof of annuity-immediate formula

2.1.2 Annuity-due

2.1.3 Perpetuity

o 2.2 Life annuities

3 Amortization calculations

4 Example calculations

5 Legal regimes

6 See also

7 References

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.

Equity-indexed annuities Annuities with payments linked to an index. Typically the

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 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]

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.
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.




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:


Proof of annuity-immediate formula[edit]

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:

which is the desired result.

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,

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






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:


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:


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)
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:

where is the interest rate and

is the effective discount rate.

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:

because the scheme is equivalent with borrowing the amount


, and putting

to create a perpetuity with

of that borrowed amount in the bank to grow with interest .

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

See also fixed rate mortgage.

Example calculations[edit]
Formula for Finding the Periodic payment(R), Given A:
R = A/(1+(1-(1+((j/m) )^(-(n-1))/(j/m))
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)
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