contingent annuity

A series of payments scheduled to begin at the time of a specified event. For example, an individual's dea
th may set inmotion an annuity payable to a designated person or organization.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David
L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton
Mifflin Company. All rights reserved.

Present Value of an Ordinary Annuity Example

You have inherited $20,000 from your father and you wish to purchase a contract that will
provide you a steady income for next 10 year. Currently, banks are paying 12% compound
interest on the annual basis. How much would you be able to receive on yearly basis?
Solution:
We have,
Present Value (PV) = $20,000
Number of period (n) = 10 year
Interest rate (r) = 12%
Present value annuity = P[1-(1+r)-n/r]
$20,000 = P[1-(1+0.12)-10/0.12]
P = $3540

Future Value of an Ordinary Annuity Example

You have travel enthusiasm and curious to visit Asia but cannot afford the lump sum
amount of $800. Currently, from your salary, you can save only $150 per month and you are
searching for a source which would provide you the sum after 5 years to enjoy a trip to Asia.
For this, you consider buying an annuity contract with 7% interest rate annually.
Solution:
We have,
Monthly installments (P) = $150
Number of period (n) = 5 year
Interest rate (r) = 7%
Future value annuity = P[(1+r)n-1/r]
Future value annuity = $150 [(1+0.07)5-1/0.07]
Future value annuity = $862.62