SH1612

Annuities
I. Annuity
An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds
from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in
time. (Investopedia.com)
It is also a series of equal payments made or received over a regular interval of time with applied interest.
Requirements of Annuity
 Periodic payment or receipt of equal amounts
o These are the series of payments made or received over time. These must be of equal amounts.
 Same length of time interval
o This is the duration or period over which the payments are made or received. These are of
equal breaks or gaps.
 Interest
o This is the rate at which the payments are or will be invested.
II. Types of Annuity
Ordinary Annuity - A series of equal payments made at the end of each period over a fixed amount of time.
(𝟏+𝒊)𝒏 −𝟏
Future Value of Ordinary Annuity (𝑭𝑽𝒐𝒂 ) = 𝑪 [ ]
𝒊
Where: C = amount paid or received ;
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑖 = ;
𝑛𝑜.𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑡𝑖𝑚𝑒𝑠 𝑝𝑒𝑟𝑖𝑜𝑑.
𝑝𝑒𝑟𝑖𝑜𝑑: annually = 1, semi-annually =2, monthly = 12 quarterly = 4
𝟏−(𝟏+𝒊)−𝒏
Present Value of Ordinary Annuity (𝑷𝑽𝒐𝒂 ) = 𝑪 [ ]
𝒊
Where: C = amount paid or received ;
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑖 = ;
𝑛𝑜.𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑥 𝑝𝑒𝑟𝑖𝑜𝑑𝑠.

Annuity Due - An annuity whose payment is to be made immediately, rather than at the end of the period.
(𝟏+𝒊)𝒏 −𝟏
Future Value of Annuity Due(𝑭𝑽𝒂𝒅 ) = 𝑪 [ ] (𝟏 + 𝒊)
𝒊
Where: C = amount paid or received;
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑖 = ;
𝑛𝑜.𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑥 𝑝𝑒𝑟𝑖𝑜𝑑𝑠.
𝟏−(𝟏+𝒊)−𝒏
Present Value of Annuity Due(𝑷𝑽𝒂𝒅 ) = 𝑪 [ ] (𝟏 + 𝒊)
𝒊
Where: C = amount paid or received ;
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑖 = ;
𝑛𝑜.𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑥 𝑝𝑒𝑟𝑖𝑜𝑑𝑠.

Deferred Annuity - A type of annuity contract that delays payments of income, installments, or a lump sum
until the investor elects to receive them.
Present Value of Deferred Annuity(𝑷𝑽𝒅𝒂 ) =
𝟏−(𝟏+𝒊)−𝒏
𝑪[ ] (𝟏 + 𝒊)−𝒌
𝒊
Where: C = amount paid or received;
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑖 = ;
𝑛𝑜.𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
𝑛 = 𝑡𝑖𝑚𝑒 𝑥 𝑛𝑜. 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠,
𝑘 = 𝑛𝑜. 𝑜𝑓 𝑑𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑𝑠.

07 Handout 1 *Property of STI

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