AMOUNT OF AN ANNUITY DUE ‘The amount ar future value of an annuity due is the sum of the compound amounts of all payments accumulated at the end of the term of the annuity due. . Consider an annuity due of Rs. 1,000 payable at the beginning of every year for 3 years at 8% effective rate of interest, The payments are shown in the following figure : Term of the annuity ° 1 2 3 5 Fs. 1,000 Rs. 1,000 Rs. 1,000 Periodic payments The first payment of Rs. 1,000 made at the beginning of first year will earn interest for 3 years and this will amount at the end of the term to Rs. 1,000 (1.08), ie. Rs. 1259.71, Second instalment of Rs. 1,000 made at the beginning of second year will amount at the end of the term to Rs. 1,000 (1.08), ie. Rs. 1,166.40. The third and last payment of Rs. 1,000 will remain in the account for one year, since the payment is made at the beginning of the year and earns interest for one year. This instalment will amount at the end of the term of the annuity (due) to Rs. 1,000 (1.08), i.e. Rs. 1,080. The third and last payment of Rs. 1,000 will remain in the account for one year, since the payment is made at the beginning of the year and earns interest for one year. This instalment will amount at the end of the term of the annuity (due) to Rs. 1,000 (1.08), i. Rs. 1,080. Recall that in case of ordinary annuity, the last payment of Rs. 1,000 will earn no interest, since the payment is made at the end of the period, i.e. at the end of term of the annuity. ‘The amount of this annuity is A= Rs. 1,259.71 + Rs. 1,166.40 + Rs. 1,080.00 = Rs. 3,506.11 ‘This annuity due illustrated in the following figure : Payment periods ° 1 2 3 ++ 1,000 1,000 Rs. 1000 Payments (In is.) Lt. ss. 1,000 (1.08)* = Rs. 1,080.00 Fis, 1,000 (1.08)* = Rs, 1,166.40 Rs, 1,000 (1.08)° “Amount‘Thus, amount of an annuity due of Rs. 1,000 payable at the beginning of every year for 3 years at a rate of 8% effective is Rs. 3,506.11. Remark ; The amount of an ordinary annuity of Rs. 1,000 payable for 3 year at 8% ‘effective is 3,246.40. So it is understood that the amount of an annuity due is always greater than the amount of an ordinary annuity for a given periodic payment (R), term (n periods) and rate of interest (i). Now we derive the formula for the amount of an annuity due in a general problem. Let R= The periodic payment t = term of the annuity due (in years) m = number of conversion periods per years n = number of payment periods (n = mt) r = rato of interest per annum i= rate of interest per conversion period (i = r/m) ‘The first payment of Rs. R made at the beginning of the first period earns interest for n periods and will amount to R (1 + i at the end of the term. The second payment of Rs. R earns interest for n — 1 periods and will amount to R(1+i)'-1 at the end of the term. Continuing in this manner, the last payment Rs. R made at the beginning of last payment periods will earn interest for one period and amount to R (1 + i). This is illustrated in the following figure : n-1 n-2 n-1 49 R R R | Ly pie RO +i? po R(1 +0? Ri +)°-? Ri +)! R49"Adding these amounts, we get the amount of annuity due A=RUL+iP +R + ne ¢ RO +P +R HI) A=RUL4iP +0 4iP-1 4... +P +O +d) A=RUD+D +4 P+ a FIP T+ LI] A=RA+H) 144+ (Lt iP-t+ ein oro A=R(+i) 1ti- oe Lererte grt pene ann [St a asa aero i asn[Qeeot 4] ‘Thus, the amount of an annuity due of Rs. R payable at the beginning of every period for rn periods at a rate of i per period is given by Remark 2 : The amount A contain the periodic payments and the interest accumulated. ‘The interest earned will be given by I=A-nR