ANNUITIES

An annuity is a series of equal payments occurring at equal periods of time

● Ordinary annuity
o Payments are made at the end of each period

1 − (1 + 𝑖)−𝑛
𝑃 = 𝐴[ ]
𝑖

( 1 + 𝑖)𝑛 − 1
𝐹= [ ]
𝑖
Ex.
a.What are the present worth and the accumulated amount of a 10 year annuity paying 10,000 at
the end of each year with interest as 15% compounded annually?
Ans. F = 203, 037

b. A chemical engineer wishes to set –up a special fund by making a uniform semi-annual end- of
period deposits for 20 years. The fund is to provide a 100,000 at the end of each of the last five
years of a 20 year period. If interest is 8% compounded semi-annually, what is the required semi-
annual deposit to be made?
Ans. A = 6,193.99

● Deferred annuity
o The first payment is made several periods after the beginning of the annuity
1 − (1 + 𝑖)−𝑛
𝑃 = 𝐴[ ] (1 + 𝑖)−𝑚
𝑖

Ex.
a. If 10,000 is deposited each year for 9 years, how much annuity can a person get annually
from the bank for 8 years starting 1 year after the 9th deposit is made. Cost of money is
14%
Ans. A = 34, 675
b. A debt of 40,000 whose interest rate is 15% compounded semi-annually, is to be
discharged by a series of 10 semi-annual payment, the first payment is to be made 6
months after consummation of the loan. The first 6 payemnts will be 6,000 each while the
remai6 mm ñ aning 4 payments will be equal and of such amount that the final payment will
liquidate the debt. What is the amount of the last 4 payments?
Ans.:A = 5454

PERPETUITY
An annuity in which the payments continue indefinitely
𝐴
Q𝑃 = 𝑖
Ex. What amount of money invested today at 15% interest can provide the following.