1st Sem 2020 ANNUITY

ANNUITIES – a series of equal payments made at equal intervals of time.

TYPE OF ANNUITIES
Page |
1
Ordinary Annuity - one where equal payments are made at the end of each payment period starting
from the 1st period.

Formula:
a) Present worth

[ ( 1 + i )n - 1]
P = A ----------------------
( 1 + i )n i

0 1 2 3 4 n

A A A A A

b) Future worth

[ (1 + i )n – 1 ]
F = A ----------------------
i

0 1 2 3 4 n

A A A A A

College of Engineering, Architecture & Technology

1st Sem 2020 ANNUITY

Deferred Annuity - it is also Ordinary annuity but the payment of the first amount is deferred a certain
number of periods after the first period.

Formula: Page |
a) Present worth 2

[ ( 1 + i )6 - 1]
P = A ---------------------- the Present worth at the beginning of annuity
( 1 + i )6 i

P
P1 = --------------- the Present worth at point 0
( 1 + i )4

0 1 2 3 4 5 6 7 8 9 10

A A A A A A

P1

College of Engineering, Architecture & Technology

1st Sem 2020 ANNUITY

b) Future worth

[ (1 + i )6 – 1 ]
F = A ---------------------- Page |
i 3

F
P1 = ------------------- the Present worth at point 0
( 1 + i )10

0 1 2 3 4 5 6 7 8 9 10

A A A A A A

P1

College of Engineering, Architecture & Technology

1st Sem 2020 ANNUITY

Annuity Due - it is one where payments are made at the start of each period, beginning from the first
period.
Page |
4
Formula:
a) Present worth

A [ ( 1 + i )n - 1 - 1 ]
P = -------------------------------- + A
( 1 + i )n - 1 i

b) Future worth

A [ ( 1 + i )n + 1 - 1 ]
F = -------------------------------- - A
i

Perpetuity - it is one where payment periods extend forever or in which the periodic payments continue
indefinitely.

Formula:
A
P = ------
i

College of Engineering, Architecture & Technology