Financial Mathematics Annuity-Immediate Calculation

Financial Mathematics
MA
Department of Mathematics
October 5, 2022
MA ACTU 371 October 5, 2022 1 / 66

Chapter 2: Annuities
Main Content
1 Annuity
2 Annuity-immediate calculation
3 Annuity-due calculation
4 Perpetuity
5 Continuous Annuities
6 Basic Annuity Problems
7 Deferred Annuities
8 Annuities with Varying Payments
9 A Single Formula for Annuities with Terms in Arithmetic Progression
10 Annuities with Terms in Geometric Progression
MA ACTU 371 October 5, 2022 2 / 66

Section 2.1: Annuity
An annuity is a sequence of cash flows (paid/received) made at equal intervals of time. For example, house rents, mortgage
payments and interest payments on money invested.
The interval between annuity payments is called payments period.

An annuity is said to have level payments if all payments Cj are equal.
An annuity has nonlevel payments if some payments Cj are different from other ones.
The payments can be made either at the beginning or at the end of intervals of time.
(1) For an annuity-immediate payments are made at the end of the intervals of time.
Explanation: Consider the intervals: [0, 1], [1, 2], [2, 3], ...[n − 1, n], the payments is an annuity–immediate payments
are made at [0, 1], [1, 2], [2, 3], ...[n − 1, n].
An annuity–immediate is a cashflow of the type:
Contributions 0 C1 C2 ... Cn
Time 0 1 2 ... n
(2) For an annuity–due the payments are made at the beginning of the intervals of time.
Explanation: Consider the intervals: [0, 1], [1, 2], [2, 3], ...[n − 1, n], the payments is an annuity-due payments are
made at [0, 1], [1, 2], [2, 3], ...[n − 1, n].
An annuity-due is a cashflow of the type:
Contributions C0 C1 ... Cn−1 0

Time 0 1 ... n−1 n
MA ACTU 371 October 5, 2022 3 / 66

Section 2.2: Annuity-immediate calculation
The cashflow of an annuity-immediate with level payments of 1 is
Contributions 0 1 1 ... 1
Time 0 1 2 ... n
The present value of annuity–immediate an| is the sum of the individual present values of the payments of 1.
If the time value of the money follows an accumulation function a(t), then
n
1 1 1 X 1
an| = + + ··· + =
a(1) a(2) a(n) j=1
a(j)
The future value of an annuity–immediate with level annual payments of one is

n
a(n) a(n) a(n) X a(n)
sn| = + + ··· + =
a(1) a(2) a(n) j=1
a(j)
1 , t > 0. Find a
Example: You are given that δt = 8+t and sn| .
n|
MA ACTU 371 October 5, 2022 4 / 66

The cashflow of an annuity-immediate with level payments of 1 is
Time 0 1 2 ... n
The present value of annuity–immediate an| is the sum of the individual present values of the payments of 1.
n
1 1 1 X 1
an| = + + ··· + =
a(1) a(2) a(n) j=1
a(j)
The future value of an annuity–immediate with level annual payments of one is

n
sn| = + + ··· + =
a(1) a(2) a(n) j=1
a(j)
1 , t > 0. Find a
Example: You are given that δt = 8+t and sn| .
n|
tR
Solution: Remember: a(t) = e 0 δs ds .
Z t Z t
1 8+t ln 8+t 8+t
t
δs = = ln(8 + s) = ln(8 + t) − ln(8) = ln ⇒ a(t) = e 8 =

0 0 8+s 0 8 8
n n
X 1 X 8
an| = =
j=1
a(j) j=1
8+j
n n 8+n n
X a(n) X
8
X 8+n
sn| = = 8+j
=
j=1
a(j) j=1 j=1
8+j
8
MA ACTU 371 October 5, 2022 4 / 66

Now we want to drive an expression for the present value an| as an equation of value at the beginning of the first period.
A unit annuity is one for which each regular payment is 1. Consider an annuity of under which payments of 1 are made at the
end of each period for n periods:
Time 0 1 2 ... n
The present value of a payment of 1 made at the end of the first period is ν.
The present value of a payment of 1 made at the end of the second period is ν 2 .
The present value of a payment of 1 made at the end of the third period is ν 3 . This process is continued until
The present value of a payment of 1 made at the end of the nth period is ν n .
The present value of annuity–immediate is the sum of the individual present values of the payments of 1:
2 3 n−1 n
an| = ν + ν + ν + · · · + ν +ν
n
1−ν 2 n 1 − r n+1
=ν geometric series:1 + r + r + · · · + r = , r 6= 1
1−ν 1−r
n
1−ν
=ν Remember: 1 − ν = d and d = iν ⇒ 1 − ν = iν
iν
1 − νn
=
i
MA ACTU 371 October 5, 2022 5 / 66

Now we want to drive an expression for sn| as an equation of value at the beginning of the first period.
The future value of a payment of 1 made at the end of the first period is (1 + i)n−1 .
The future value of a payment of 1 made at the end of the second period is (1 + i)n−2 .
The future value of a payment of 1 made at the end of the third period is (1 + i)n−3 . This process is continued until
The future value of a payment of 1 made at the end of the nth period is 1.
The future value of annuity–immediate is the sum of the individual future values of the payments of 1:
n−1 n−2
sn| = (1 + i) + (1 + i) + · · · + (1 + i) + 1
(1 + i)n − 1
=
(1 + i) − 1
(1 + i)n − 1
=
i
Theorem: If i 6= 0, the present value of an annuityimmediate with level payments of one is
1 − νn 1 − (1 + i)−n
an|i = an| = =
i i
(1 + i)n − 1
sn|i = sn| =
i
MA ACTU 371 October 5, 2022 6 / 66

Note:
1 Annuities with level payments other than 1. If an immediate annuity has payment P, its present value and future value
are given by
PV = P an|
FV = P sn|
2 Relationships between present and future values. There is simple relationships between an| and sn|
(1+i)n −1
sn| = (1 + i)n an| = i
n (1+i)n −(1+i)n ν n (1+i)n −1
Explanation: (1 + i)n an| = (1 + i)n 1−ν
i
= i
= i
= sn|
an| = ν n sn|
(1+i)n −1 ν n (1+i)n −ν n n
Explanation: ν n sn| = ν n i
= i
= 1−ν
i
Example: Calculate the present and future values of $5000 paid at the end of each year for 15 years using an annual effective
interest rate of 7.5%.
MA ACTU 371 October 5, 2022 7 / 66

Note:
1 Annuities with level payments other than 1. If an immediate annuity has payment P, its present value and future value
are given by
PV = P an|
FV = P sn|
2 Relationships between present and future values. There is simple relationships between an| and sn|
(1+i)n −1
sn| = (1 + i)n an| = i
n (1+i)n −(1+i)n ν n (1+i)n −1
Explanation: (1 + i)n an| = (1 + i)n 1−ν
i
= i
= i
= sn|
an| = ν n sn|
(1+i)n −1 ν n (1+i)n −ν n n
Explanation: ν n sn| = ν n i
= i
= 1−ν
i
Example: Calculate the present and future values of $5000 paid at the end of each year for 15 years using an annual effective
interest rate of 7.5%.
Solution: The present value is
1 − (1 + 0.075)−15
PV = 5000a15|0.075 = (5000) = 44135.59873
0.075
(1 + 0.075)15 − 1
FV = 5000s15|0.075 = (5000) = 130591.824
0.075
MA ACTU 371 October 5, 2022 7 / 66

Example: If i = 5% and n = 10, find sn| .
MA ACTU 371 October 5, 2022 8 / 66

Solution:
(1 + i)n − 1
sn|0.05 = sn| =
i
(1 + 0.05)10 − 1
⇒ s10| = = 12.5779
0.05
MA ACTU 371 October 5, 2022 8 / 66

Solution:
(1 + i)n − 1
sn|0.05 = sn| =
i
(1 + 0.05)10 − 1
⇒ s10| = = 12.5779
0.05
Example: If n = 15 and i = 6%, find

(1) an|
(2) sn| .
MA ACTU 371 October 5, 2022 8 / 66

Solution:
(1 + i)n − 1
sn|0.05 = sn| =
i
(1 + 0.05)10 − 1
⇒ s10| = = 12.5779
0.05
Example: If n = 15 and i = 6%, find

(1) an|
(2) sn| .
Solution:
(1)
1 − (1 + 0.06)−15
a15| = = 9.712
0.06
(2)
(1 + 0.06)15 − 1
s15| = = 23.276
0.06
MA ACTU 371 October 5, 2022 8 / 66

Section 2.3: Annuity-due calculation
We want to drive an expression for the present value än| as an eqaution of value at the beginning of the first period.
Consider an annuity of under which payments of 1 are made at the beginning of each period for n periods:
Contributions 1 1 ... 1 0
Time 0 1 ... n−1 n
The present value of annuity–due än| is the sum of the individual present values of the payments of 1.
n−1
1 1 1 X 1
än| = 1 + + + ··· + =
a(1) a(2) a(n − 1) j=0
a(j)
The future value of an annuity–due with level annual payments of one is
n−1
s̈n| = a(n) + + + ··· + =
a(1) a(2) a(n − 1) j=0
a(j)
Now we want to drive an expression for än| and s̈n| .
The present value of a payment of 1 made at the beginning of the first period is 1.
The present value of a payment of 1 made at the beginning of the second period is ν.
The present value of a payment of 1 made at the beginning of the third period is ν 2 . This process is continued until
The n−th payments occurs at n − 1. So, the present value of a payment of 1 made at the beginning of the nth period
is ν n−1 .
The present value of annuity–due is the sum of the individual present values of the payments of 1:
MA ACTU 371 October 5, 2022 9 / 66

2 3 n−1
än| = 1 + ν + ν + ν + · · · + ν
n
1−ν
=
1−ν
1 − νn
=
d
1−ν n
So, än| = d
.
Similarly for s̈n| , we have the following formulas:
2 3 n−1 n
s̈n| = (1 + i) + (1 + i) + (1 + i) + · · · + (1 + i) + (1 + i)
(1 + i)n − 1
= (1 + i)
(1 + i) − 1
(1 + i)n − 1 i
= Remember: d =
d 1+i
Theorem: If i 6= 0, the present value of an annuity-due with level payments of one is
1 − νn
än| =
d
(1 + i)n − 1
s̈n| =
d
MA ACTU 371 October 5, 2022 10 / 66

Notes:
1 Annuities with level payments other than 1. If due annuity has payment P, then
PV = P än| FV = P s̈n|
2 Relationships between present and future values.
(1)
1 − νn Also,
än| =
d
1 − νn
=i i i 1 − νn
i d an| =
i 1 − νn i d d i
= = an| 1 − νn
d i d = = än|
i i 1 − νn d
= (1 + i) an| Remember: d = ⇒1+i = and an| =
1+i d i
(2)
(1 + i)n − 1 Also,
s̈n| =
d
(1 + i)n − 1
=i i i (1 + i)n − 1
i d sn| =
i (1 + i)n − 1 i d d i
= = sn| (1 + i)n − 1
d i d = = s̈n|
i i (1 + i)n − 1 d
= (1 + i) sn| Remember: d = ⇒1+i = and sn| =
1+i d d
MA ACTU 371 October 5, 2022 11 / 66
(3)
n+1 n+1 1 − νn
(1 + i) an| = (1 + i)
i
(1 + i)n .1 − (1 + i)n ν n n+1 n
= (1 + i) (1 + i) = (1 + i).(1 + i)
i
n
(1 + i) − 1
= = s̈n|
d
Theorem:
1 ä = di a = (1 + i) a
n| n| n|
2 s̈n| = di sn| = (1 + i) sn| 3 s̈n| = (1 + i)n+1 an|
Example: If i = 5% and n = 10, find än| .
MA ACTU 371 October 5, 2022 12 / 66

(3)
n+1 n+1 1 − νn
(1 + i) an| = (1 + i)
i
(1 + i)n .1 − (1 + i)n ν n n+1 n
= (1 + i) (1 + i) = (1 + i).(1 + i)
i
n
(1 + i) − 1
= = s̈n|
d
Theorem:
1 ä = di a = (1 + i) a
n| n| n|
n
Solution: We know that än| = 1−ν
d
1 and d = i
where ν = 1+i 1+i
So,
1
1 − ( 1+0.05 )10
ä10| = 0.05
= 8.1078
1+0.05
MA ACTU 371 October 5, 2022 12 / 66

(3)
n+1 n+1 1 − νn
(1 + i) an| = (1 + i)
i
(1 + i)n .1 − (1 + i)n ν n n+1 n
= (1 + i) (1 + i) = (1 + i).(1 + i)
i
n
(1 + i) − 1
= = s̈n|
d
Theorem:
1 ä = di a = (1 + i) a
n| n| n|
n
d
1 and d = i
where ν = 1+i 1+i
So,
1
1 − ( 1+0.05 )10
ä10| = 0.05
= 8.1078
1+0.05
Example: If i = 6%, find ä15| and s̈15| .
MA ACTU 371 October 5, 2022 12 / 66

(3)
n+1 n+1 1 − νn
(1 + i) an| = (1 + i)
i
(1 + i)n .1 − (1 + i)n ν n n+1 n
= (1 + i) (1 + i) = (1 + i).(1 + i)
i
n
(1 + i) − 1
= = s̈n|
d
Theorem:
1 ä = di a = (1 + i) a
n| n| n|
n
d
1 and d = i
where ν = 1+i 1+i
So,
1
1 − ( 1+0.05 )10
ä10| = 0.05
= 8.1078
1+0.05
Example: If i = 6%, find ä15| and s̈15| .
Solution:
1
1 − ( 1+0.06 )15
ä15| = 0.06
= 10.295
1+0.06
(1 + 0.06)15 − 1
s̈15| = 0.06
= 24.673
1+0.06
MA ACTU 371 October 5, 2022 12 / 66

Exercise: You want to accumulate $12,000 in a 5% account by making a level deposit at the beginning of each of the next 9
years. Find the required level payment.
MA ACTU 371 October 5, 2022 13 / 66

Solution:
(1 + i)n − 1
FV = P s̈n| = P
d
where
i 0.05
d = =
1+i 1 + 0.05
This implies
(1.05)9 − 1 12000
12000 = P ⇒P = = 1036.46
0.05 (1.05)9 −1
1+0.05 0.05
1+0.05
MA ACTU 371 October 5, 2022 13 / 66

Solution:
(1 + i)n − 1
FV = P s̈n| = P
d
where
i 0.05
d = =
1+i 1 + 0.05
This implies
(1.05)9 − 1 12000
12000 = P ⇒P = = 1036.46
0.05 (1.05)9 −1
1+0.05 0.05
1+0.05
Exercise: A loan for 8,000 must be repaid with 6 year end payments at an annual rate of 11%. What is the annual payment?
MA ACTU 371 October 5, 2022 13 / 66

Solution:
(1 + i)n − 1
FV = P s̈n| = P
d
where
i 0.05
d = =
1+i 1 + 0.05
This implies
(1.05)9 − 1 12000
12000 = P ⇒P = = 1036.46
0.05 (1.05)9 −1
1+0.05 0.05
1+0.05
n 1−( 1 )6
Solution: PV = P an| ⇒ P = aPV where an| = 1−ν
i
⇒ an| = 1+i
0.06
= 4.2305
n|
8000 = 1, 891.01
So, P = 4.2305
MA ACTU 371 October 5, 2022 13 / 66

Solution:
(1 + i)n − 1
FV = P s̈n| = P
d
where
i 0.05
d = =
1+i 1 + 0.05
This implies
(1.05)9 − 1 12000
12000 = P ⇒P = = 1036.46
0.05 (1.05)9 −1
1+0.05 0.05
1+0.05
n 1−( 1 )6
i
⇒ an| = 1+i
0.06
= 4.2305
n|
8000 = 1, 891.01
So, P = 4.2305
Exercise: You wish to make a deposit of now in an account earning 6% annually so that you can get a payment of 250 at the
end of each of the next 8 years. How much should you deposit today?
MA ACTU 371 October 5, 2022 13 / 66

Solution:
(1 + i)n − 1
FV = P s̈n| = P
d
where
i 0.05
d = =
1+i 1 + 0.05
This implies
(1.05)9 − 1 12000
12000 = P ⇒P = = 1036.46
0.05 (1.05)9 −1
1+0.05 0.05
1+0.05
n 1−( 1 )6
i
⇒ an| = 1+i
0.06
= 4.2305
n|
8000 = 1, 891.01
So, P = 4.2305
Exercise: You wish to make a deposit of now in an account earning 6% annually so that you can get a payment of 250 at the
end of each of the next 8 years. How much should you deposit today?
(1+0.06)8 −1
Solution: FV = P sn| = 250 0.06
= 2474.367
s
n n|
Now, sn| = (1 + i) an| ⇒ an| = = 2474.3678 = 1552.45
(1+i)8 (1+0.06)
MA ACTU 371 October 5, 2022 13 / 66

Section 2.4: Perpetuity
A perpetuity is an annuity whose payments continue forever. An example of a perpetuity is as in the real-estate sector when an
owner purchases a property and then rents it out. The owner is entitled to an infinite stream of cash flow from the renter as
long as the property continues to exist (assuming the renter continues to rent).
Perpetuity–immediate
The present value of a perpetuity–immediate that pays 1 per period is denoted by a∞|
2 3
a∞| = ν + ν + ν + . . .
ν
=
1−ν
ν
=
iν
1
=
i
Alternatively, we have
1 − νn 1 n 1
a∞| = lim a = lim = where lim ν = lim =0
n→∞ n| n→∞ i i n→∞ n→∞ (1 + i)n
Perpetuity-due
For perpetuity-due, we have
1 − νn 1 1+i n
ä∞| = lim ä = lim = = where lim ν = 0
n→∞ n| n→∞ d d i n→∞
MA ACTU 371 October 5, 2022 14 / 66

Theorem: If i 6= 0, then
(1) A perpetuity-immediate:
The present value with level payments of one is
1
a∞| =
i
The present value with level payments of P is
P
FV = P a∞| =
i
(2) A perpetuity-due:
1 1+i
ä∞| = =
d i
P
FV = P ä∞| =
d
MA ACTU 371 October 5, 2022 15 / 66

1
a∞| =
i
P
FV = P a∞| =
i
1 1+i
ä∞| = =
d i
P
FV = P ä∞| =
d
Example: If i = 5%, find (1) a∞| (2) ä∞| .
MA ACTU 371 October 5, 2022 15 / 66

1
a∞| =
i
P
FV = P a∞| =
i
1 1+i
ä∞| = =
d i
P
FV = P ä∞| =
d
Solution:
(1) a∞| = 1i = 0.05
1 = 20
1 1+i
(2) ä∞| = d = i = 1.05 = 21
0.05
MA ACTU 371 October 5, 2022 15 / 66

1
a∞| =
i
P
FV = P a∞| =
i
1 1+i
ä∞| = =
d i
P
FV = P ä∞| =
d
Solution:
(1) a∞| = 1i = 0.05
1 = 20
1 1+i
(2) ä∞| = d = i = 1.05 = 21
0.05
Example: Find the present vlaue of a perpetuity immediate with i = 8%.
MA ACTU 371 October 5, 2022 15 / 66

1
a∞| =
i
P
FV = P a∞| =
i
1 1+i
ä∞| = =
d i
P
FV = P ä∞| =
d
Solution:
(1) a∞| = 1i = 0.05
1 = 20
1 1+i
(2) ä∞| = d = i = 1.05 = 21
0.05
Example: Find the present vlaue of a perpetuity immediate with i = 8%.
Solution: a∞| = 1i = 0.08

1 = 12.5
MA ACTU 371 October 5, 2022 15 / 66

Example: John uses his retirement fund to buy a perpetuity-due of 20,000 per year based on an annual nominal interest 8%
compounded monthly. Find Johns retirement fund.
MA ACTU 371 October 5, 2022 16 / 66

Solution: We use
P i
PV = where d =
d 1+i
MA ACTU 371 October 5, 2022 16 / 66

Solution: We use
P i
PV = where d =
d 1+i
First, we have to find i.
Remember:
i (m) m
1 + i = (1 + )
m
MA ACTU 371 October 5, 2022 16 / 66

Solution: We use
P i
PV = where d =
d 1+i
Remember:
i (m) m 0.08 12
1 + i = (1 + ) ⇒ 1 + i = (1 + )
m 12
MA ACTU 371 October 5, 2022 16 / 66

Solution: We use
P i
PV = where d =
d 1+i
Remember:
i (m) m 0.08 12 0.08 12

1 + i = (1 + ) ⇒ 1 + i = (1 + ) ⇒ i = (1 + ) − 1 = 0.08299950681 = 8.299950681%
m 12 12
MA ACTU 371 October 5, 2022 16 / 66

Solution: We use
P i
PV = where d =
d 1+i
Remember:
i (m) m 0.08 12 0.08 12

1 + i = (1 + ) ⇒ 1 + i = (1 + ) ⇒ i = (1 + ) − 1 = 0.08299950681 = 8.299950681%
m 12 12
0.08299950681
d = = 0.076638545
1.08299950681
MA ACTU 371 October 5, 2022 16 / 66

Solution: We use
P i
PV = where d =
d 1+i
Remember:
i (m) m 0.08 12 0.08 12

1 + i = (1 + ) ⇒ 1 + i = (1 + ) ⇒ i = (1 + ) − 1 = 0.08299950681 = 8.299950681%
m 12 12
0.08299950681
d = = 0.076638545
1.08299950681
Now,
20000
PV = = 260963.2872
0.076638545
MA ACTU 371 October 5, 2022 16 / 66

Section 2.5: Continuous Annuities
Continuous annuity is a special case of annuities payable more frequently than convertible interest and it is a state in which the
frequency of payment becomes infinite, i.e. payments are made continuously.
The present value of an annuity payable continuously for n interest conversion periods, such that the total amount paid during
each interest conversion period is 1, by the symbol ān| and is defined as follows:
Z n
t
ān| = ν dt
0
Z n
t ln ν t ln ν t t ln ν
= e dt Remember: ν = e =e
0
Z n
−t ln(1+i) 1 −1 ln ν ln(1+i)−1 − ln(1+i)
= e dt Remember: ν = = (1 + i) ⇒e =e =e
0 1+i
Z n
−δt
= e dt Remember: δ = ln(1 + i)
0
−1 −δt n 1 1 at
Z Z
at at
= e Remember: e dt = a e dt = e + c
δ 0 a a
−1 −δn
= e −1
δ
−1 −δ n −1 ln(1+i)−1 n
= e −1 = e −1
δ δ
−1 ln ν n −1 n
= e −1 = (ν − 1)
δ δ
1 n
= (1 − ν )
δ
so, we have
1 − νn
ān| =
δ
MA ACTU 371 October 5, 2022 17 / 66
Similarly, the future value is
Z n
t
s̄n| = (1 + i) dt
0
Z n Z n
ln(1+i)t t ln(1+i)
= e dt = e dt
0 0
Z n
δt
= e dt
0
1δt n
1 h δn i
= e = e −1
δ 0 δ
1 h δ n i 1 h ln(1+i) n i
= e −1 = e −1
δ δ
1h n
i
= (1 + i) − 1
δ
so, we have
(1 + i)n − 1
s̄n| =
δ
Theorem:
(1) The present value of a continuous annuity with rate C (t) = 1, 0 ≤ t ≤ n, is
1 − νn
ān| =
δ
(2) The future value at time n of a continuous annuity with rate of one is
(1 + i)n − 1
s̄n| =
δ
MA ACTU 371 October 5, 2022 18 / 66
Note:
1 − νn
ān| =
δ
1 − νn
=i
i δ
i 1 − νn i
= = an|
δ i δ
Also,
(1 + i)n − 1
s̄n| =
δ
(1 + i)n − 1
=i
i δ
i (1 + i)n − 1 i
= = s
δ i δ n|
Theorem:
(1) ān| = δi an|
(2) s̄n| = δi sn|
MA ACTU 371 October 5, 2022 19 / 66

Example: If i = 5% and n = 10, find ān| and s̄n| .
MA ACTU 371 October 5, 2022 20 / 66

Solution: First, find δ = ln(1 + i), then

1
1 − ( 1+0.05 )10
ā10| = = 7.9132
ln(1 + 0.05)
(1 + 0.05)10 − 1
s̄10| = = 12.8898
ln(1 + 0.05)
MA ACTU 371 October 5, 2022 20 / 66


1
1 − ( 1+0.05 )10
ā10| = = 7.9132
ln(1 + 0.05)
(1 + 0.05)10 − 1
s̄10| = = 12.8898
ln(1 + 0.05)
MA ACTU 371 October 5, 2022 20 / 66


1
1 − ( 1+0.05 )10
ā10| = = 7.9132
ln(1 + 0.05)
(1 + 0.05)10 − 1
s̄10| = = 12.8898
ln(1 + 0.05)

1
1 − ( 1+0.06 )15
ā15| = = 10.0008
ln(1 + 0.06)
(1 + 0.06)15 − 1
s̄15| = = 23.9675
ln(1 + 0.06)
MA ACTU 371 October 5, 2022 20 / 66

Section 2.6: Basic Annuity Problems
Example: A loan for 20,000 must be repaid by 5 year-end payments with interest at an annual effective rate of 12%. What is
the annual payment?
MA ACTU 371 October 5, 2022 21 / 66

the annual payment?
n 1−( 1 )5
Solution: Apply the formula: PV = P an| = P 1−ν
i
and for n = 5 and i = 12%, we have a5| = 1+0.12
0.12
= 3.60478
The annual payment:
20000 20000
20000 = P a5| ⇒ P = = = 5548.1946
a5| 3.60478
MA ACTU 371 October 5, 2022 21 / 66

the annual payment?
n 1−( 1 )5
i
0.12
= 3.60478
The annual payment:
20000 20000
20000 = P a5| ⇒ P = = = 5548.1946
a5| 3.60478
Example: You have a 5,000 balance in an account earning a 4.5% annual effective rate. You want to increase your balance to
20,000 at the end of 12 years by making a level deposit at the beginning of each of the next 12 years. Find the required level
payment.
MA ACTU 371 October 5, 2022 21 / 66

the annual payment?
n 1−( 1 )5
i
0.12
= 3.60478
The annual payment:
20000 20000
20000 = P a5| ⇒ P = = = 5548.1946
a5| 3.60478
Example: You have a 5,000 balance in an account earning a 4.5% annual effective rate. You want to increase your balance to
20,000 at the end of 12 years by making a level deposit at the beginning of each of the next 12 years. Find the required level
payment.
Solution: We have that

FV = ka(t) + P s̈n|
(1+i)n −1
where ka(t) = k(1 + i)t and s̈n| = d
, i .
and d = 1+i
This implies
12 (1 + 0.045)12 − 1
20000 = 5000(1 + 0.045) +P 0.045
1+0.045
12
20000 = 5000(1 + 0.045) + 0.727196 P
20000 − 5000(1 + 0.45)12
⇒P =
0.727196
⇒ P = 1, 237.63
MA ACTU 371 October 5, 2022 21 / 66

Example: An account earning a 5% annual effective rate has a current balance of 6,000. If a deposit of 1,500 is made at the
end of each year for 20 years, what will be the balance in the account at the end of 20 years?
MA ACTU 371 October 5, 2022 22 / 66

(1+i)n −1
Solution: FV = ka(t) + Psn| where ka(t) = k(1 + i)t and sn| = i
. So,
20 (1 + 0.05)20 − 1
FV = 6000(1 + 0.05) + 1500 = 65, 518.72
0.05
MA ACTU 371 October 5, 2022 22 / 66

(1+i)n −1
. So,
20 (1 + 0.05)20 − 1
FV = 6000(1 + 0.05) + 1500 = 65, 518.72
0.05
Example: You want to accumulate at least 20,000 in an account earning a 5% annual effective rate. You will make a level
deposit of 1,000 at the beginning of each year for n years. What is the value of n?
MA ACTU 371 October 5, 2022 22 / 66

(1+i)n −1
. So,
20 (1 + 0.05)20 − 1
FV = 6000(1 + 0.05) + 1500 = 65, 518.72
0.05
Example: You want to accumulate at least 20,000 in an account earning a 5% annual effective rate. You will make a level
deposit of 1,000 at the beginning of each year for n years. What is the value of n?
Solution:
FV = P s̈n|
(1 + 0.05)n
20000 = 1000 0.05
1.05
20000 0.05
n
⇒ (1 + 0.05) = .
1000 1.05
ln(1.9524)
⇒n= = 13.71
ln(1.05)
For n = 13, we have FV = 1000s̈13| = 18, 598.63 but this amount is less than 20,000.
For n = 14, we have FV = 1000s̈14| = 20, 578.56
Thus, 14th payment is required to reach at least 20,000.
MA ACTU 371 October 5, 2022 22 / 66

Section 2.7: Deferred Annuities
A deferred annuity is an annuity whose first payment takes place at future period. Consider an annuity of under which
payments of 1 (unit annuity) are made at the end of each period for n periods:
Contributions 0 1 1 1 1 1 1 1 1
Time 0 1 2 3 4 5 6 7 8
The present value of an annuityimmediate with level payments of one is a8|

Now, assume that the payment starts from the end the third period.
Time 0 1 2 3 4 5 6 7 8
The present value of the annuity would be ν 2 a6| (the present value at the end of the third period discounted for two periods).
To see this imagine the payment starts at the end of the first period:
Time 0 1 2 3 4 5 6 7 8
The present value at t = 0 is a8| . However, we must remove the present value of the imaginary payments, which is a2| . Thus,
the present value at the end of the third period:
1 − ν8 1 − ν2 −ν 8 + ν 2 2 1 − ν6 2
a8| − a2| = − = =ν = ν a6|
i i i i
An annuity like this is called a deferred annuity.

MA ACTU 371 October 5, 2022 23 / 66
In general, the present value of an n–year unit annuity–immediate deferred for k years is ν k an| .
One form of notation for such an annuity is k| an| , so we have:
k
k| an| = ν an|
Notes:
From above explanation, we have

k
ν an| = ak+n| − ak|
Also,
k
ak+n| = ak| + ν an|
The present value of an annuity–immediate for n + k periods is the sum of the present value of a k–period
annuity–immediate and an n–period annuity deferred for k periods.
Take this example:
2 3 4 5 2 3 4 5 2 3 3 2 3
a5| = ν + ν + ν + ν + ν = (ν + ν + ν ) + (ν + ν ) = (ν + ν + ν ) + ν (ν + ν ) = a3| + ν a2|
The present value of a five-period annuity–immediate can be expressed as the sum of a 3-year annuity–immediate and a
2-year annuity–immediate deferred for 3 years:
The present value of an n-year annuity–immediate deferred for k years with level of payment P is
k
P k| an| = P ν an|
MA ACTU 371 October 5, 2022 24 / 66

Example: If a4| = 3.5460 and ν 4 = 0.8227. Find a8|
MA ACTU 371 October 5, 2022 25 / 66

Solution: From
k
we have
4
a8| = a4| + ν a4| = 3.5460 + (0.8227)(3.5460) = 6.463
MA ACTU 371 October 5, 2022 25 / 66

Solution: From
k
we have
4
a8| = a4| + ν a4| = 3.5460 + (0.8227)(3.5460) = 6.463
Example: Based on a 5% annual interest rate, find the present value of a 10-year annuity with level payments of 100 each, with
the first payment occurring 4 years from now.
MA ACTU 371 October 5, 2022 25 / 66

Solution: From
k
we have
4
a8| = a4| + ν a4| = 3.5460 + (0.8227)(3.5460) = 6.463
Example: Based on a 5% annual interest rate, find the present value of a 10-year annuity with level payments of 100 each, with
the first payment occurring 4 years from now.
Solution:
The first payment at the end of the 4th year i.e, no payments during the first 3 years, so this is a 3–year–deferred annuity
immediate.
3 1 3
1
1 − ( 1+0.05 )10
P 3| a10| = 100 ν a10| = 100 ( ) = 667.03
1 + 0.05 0.05
OR
Use the relation:

k
ν an| = ak+n| − ak|
3
1
1 − ( 1+0.05 )13 1
1 − ( 1+0.05 )3
100ν a10| = 100(a13| − a3| ) = 100( − ) = 100(9.3936 − 2.7232) = 667.03
0.05 0.05
MA ACTU 371 October 5, 2022 25 / 66

Section 2.8: Annuities with Varying Payments
Remember:
An annuity is said to have level payments if all payments Cj are equal.
An annuity has nonlevel payments if some payments Cj are different from other ones.
Any type of varying annuity can be evaluated by taking the presnt value or the accumulated value of each payment
separately and summing the results.
In this section, we consider annuities with varying payments:
(1) Annuities with Terms in Arithmetic Progression.
(2) Annuities with Terms in Geometric Progression.
MA ACTU 371 October 5, 2022 26 / 66

(1) Annuities with Terms in Arithmetic Progression.
(A) Increasing Annuities with Terms in Arithmetic Progression
An annuity whose n payments are 1, 2, 3, . . . , n is called a unit increasing annuity.
If payments are made at the end of each period, it is an increasing annuity–immediate.
The present value of the increasing annuity–immediate for n payments is denoted by (Ia)n|
Time 1 2 3 ... n Present Value

1−ν n
Payments 1 1 1 ... 1 i
n−1 n
1 1 ... 1 ν.an−1| = ν. 1−νi = ν−ν
i
n−2 2 n
1 ... 1 2
ν .an−2| = ν 2 . 1−νi = ν −ν
i
...
n−1 −ν n
1 ν n−1 .a1| = ν n−1 . 1−ν
i
= ν i
Pn−1 t
ν −nν n ä −nν n
t=0 n|
Total 1 2 3 ... n i
= i
Now, we have
än| − nν n
(Ia)n| =
i
MA ACTU 371 October 5, 2022 27 / 66

Example: Let i = 5% and n = 4. If the annuity payments are 1, 2, 3, 4, then find the present value.
MA ACTU 371 October 5, 2022 28 / 66

ä −nν n
n|
Solution: Apply (Ia)n| = i
for i = 5% and n = 4:
ä4| − 4ν 4
(Ia)4| = = 8.6488
0.05
MA ACTU 371 October 5, 2022 28 / 66

ä −nν n
n|
Solution: Apply (Ia)n| = i
for i = 5% and n = 4:
ä4| − 4ν 4
(Ia)4| = = 8.6488
0.05
For increasing unit annuity–due, remember that

i
än| = a = (1 + i)an|
d n|
ä −nν n ä −nν n
n| n|
so we have (I ä)n| = di (Ia)n| = di . i
= d
i än| − nν n
(I ä)n| = (Ia)n| = (1 + i)(Ia)n| =
d d
Also, for increasing continuously payable annuity, remember that ān| = δi an| so we have
i än| − nν n
(I ā)n| = (Ia)n| =
δ δ
MA ACTU 371 October 5, 2022 28 / 66

In the case of an increasing perpetuity, the present value is the limit of the appropriate formula as n approaches infinity:
n
Increasing unit perpetuity–immediate: (Remember: än| = 1−ν
d
)
än| − nν n 1 −0
1
(Ia)∞| = lim (Ia)n| = lim = d =
n→∞ n→∞ i i id
Increasing unit perpetuity–due:
än| − nν n 1 −0
1
(I ä)∞| = lim (I ä)n| = lim = d =
n→∞ n→∞ d d d2
Increasing continuously payable perpetuity:
än| − nν n 1 −0
1
(I ā)∞| = lim (I ā)n| = lim = d =
n→∞ n→∞ δ δ δd
MA ACTU 371 October 5, 2022 29 / 66

Example: Let i = 5% and n = 4, find (I ä)4| .
MA ACTU 371 October 5, 2022 30 / 66

Example: Let i = 5% and n = 4, find (I ä)4| .
ä −nν n
n|
Solution: Apply (I ä)n| = d
ä −4ν 4
4|
we have (I ä)4| = d
= 9.0812
The future value of an increasing unit annuity–immediate is denoted by (Is)n| . Remember:
n
sn| = (1 + i) an|
We use the previous relation to find expressions to calculate (Is)n| , and for (I ä)n| , (I ā)n| students can follow same procedure:
ä − nν n (1 + i)n än| − (1 + i)n nν n s̈n| − n

n n n|
(Is)n| = (1 + i) (Ia)n| = (1 + i) = =
i i i
s̈n| − n
n
(Is)n| = (1 + i) (Ia)n| =
i
s̈n| − n i
n
(I s̈)n| = (1 + i) (I ä)n| = = (Is)n|
d d
s̈n| − n i
n
(I s̄)n| = (1 + i) (I ā)n| = = (Is)n|
δ δ
MA ACTU 371 October 5, 2022 30 / 66

(2) Decreasing Annuities with Terms in Arithmetic Progression
An annuity whose n payments are n, n − 1, n − 2, . . . , 1 is called a unit decreasing annuity.
If payments are made at the end of each period, it is an decreasing annuity–immediate.
The present value of the decreasing annuity–immediate for n payments is denoted by (Da)n|
Time 1 2 3 ... ... n−1 n

Payments n n−1 n−2 ... ... 2 1
Now,
Time 1 2 3 ... n−2 n−1 n

decreasing annuity-immediate n n−1 n−2 ... 3 2 1
increasing annuity-immediate 1 2 3 ... n−2 n−1 n
Total n+1 n+1 n+1 ... n+1 n+1 n+1
This implies that PV = (n + 1)an| i.e. (Da)n| + (Ia)n| = (n + 1)an| .
MA ACTU 371 October 5, 2022 31 / 66

We can rearrange that formula and solve for (Da)n| :
(Da)n| = (n + 1)an| − (Ia)n|
1 − νn än| − nν n
= (n + 1) −
i i
(n + 1) − (n + 1)ν n − än| + nν n
=
i
(n + 1) − än| − ν n n − (än| − 1 + ν n )
= =
i i
n − an|
=
i
Note:
n 1 − νn n 1 − ν n − d + dν n (1 − d) − ν n (1 − d) (1 − d)(1 − ν n ) 1 − νn
än| − 1 + ν = −1+ν = = = = = an|
d d d d i
where 1−d
d
= 1i . So ,we have
n − an|
(Da)n| =
i
MA ACTU 371 October 5, 2022 32 / 66

For decreasing unit annuity–due, remember that
i
än| = a = (1 + i)an|
d n|
n−a n−a
n| n|
so we have (D ä)n| = di (Da)n| = di . i
= d
i n − an|
(D ä)n| = (Da)n| = (1 + i)(Da)n| =
d d
Also, for increasing continuously payable annuity, remember that ān| = δi an| so we have
i n − an|
(D ā)n| = (Da)n| =
δ δ
MA ACTU 371 October 5, 2022 33 / 66

The future value of an decreasing unit annuity–immediate is denoted by (Ds)n| . Remember:
n
sn| = (1 + i) an|
We use the previous relation to find expressions to calculate (Ds)n| , and for (D ä)n| , (D ā)n| students can follow same procedure:
n − an| (1 + i)n n − (1 + i)n an| n(1 + i)n − sn|

n n
(Ds)n| = (1 + i) (Da)n| = (1 + i) = =
i i i
n(1 + i)n − sn|

n
(Ds)n| = (1 + i) (Da)n| =
i
n(1 + i)n − sn|

n
(D s̈)n| = (1 + i) (D ä)n| =
d
n(1 + i)n − sn|

n
(D s̄)n| = (1 + i) (D ā)n| =
δ
MA ACTU 371 October 5, 2022 34 / 66

n
sn| = (1 + i) an|

n n
(Ds)n| = (1 + i) (Da)n| = (1 + i) = =
i i i
n(1 + i)n − sn|

n
(Ds)n| = (1 + i) (Da)n| =
i
n(1 + i)n − sn|

n
(D s̈)n| = (1 + i) (D ä)n| =
d
n(1 + i)n − sn|

n
(D s̄)n| = (1 + i) (D ā)n| =
δ
Example: Given i = 5% and n = 4, find (Da)4|
MA ACTU 371 October 5, 2022 34 / 66

n
sn| = (1 + i) an|

n n
(Ds)n| = (1 + i) (Da)n| = (1 + i) = =
i i i
n(1 + i)n − sn|

n
(Ds)n| = (1 + i) (Da)n| =
i
n(1 + i)n − sn|

n
(D s̈)n| = (1 + i) (D ä)n| =
d
n(1 + i)n − sn|

n
(D s̄)n| = (1 + i) (D ā)n| =
δ
Example: Given i = 5% and n = 4, find (Da)4|
n−a
n|
Solution: (Da)n| = i
, so for n = 4 and i = 0.05,we have
4 − a4| 4 − 3.546
(Da)4| = = = 9.08
0.05 0.05
MA ACTU 371 October 5, 2022 34 / 66

Exercises
Exercise 1: An annuity pays 1 at the end of each of the next four years and 2 at the end of each of the four following years.
Based on a 5% annual effective rate, what is the present value of this annuity?
MA ACTU 371 October 5, 2022 35 / 66

Exercises
Exercise 1: An annuity pays 1 at the end of each of the next four years and 2 at the end of each of the four following years.
Based on a 5% annual effective rate, what is the present value of this annuity?
Solution: This sequence of payments can be broken down into an 8-year annuity–immediate with payments of 1, plus a
4–year–deferred annuity–immediate with 4 payments of 1 each:
Time 1 2 3 4 5 6 7 8 Present Value

8
Payments 1 1 1 1 1 1 1 1 a8| = 1−ν
0.05
4
1 1 1 1 ν 4 .a4| = ν 4 . 1−ν
0.05
Total 1 1 1 1 2 2 2 2 a8| + ν 4 .a4|
4 1 − ν8 4 1 − ν4
a8| + ν .a4| = +ν . = 9.38
0.05 0.05
Another approach is to analyze this series of payments:
a 4–year annuity–immediate with payments of 1, plus a 4–year–deferred annuity–immediate with 4 payments of 2 each:
4 1 − ν4 4 1 − ν4
a4| + ν .2a4| = + 2ν . = 9.38
0.05 0.05
MA ACTU 371 October 5, 2022 35 / 66

Exercises
Exercise 2: An annuity pays 100 at the end of each of the next 10 years and 200 at the end of each of the five subsequent
years. If i = 0.08 , find the present value of the annuity.
MA ACTU 371 October 5, 2022 36 / 66

Exercises
Exercise 2: An annuity pays 100 at the end of each of the next 10 years and 200 at the end of each of the five subsequent
years. If i = 0.08 , find the present value of the annuity.
Solution: This sequence of payments can be broken down into an 8-year annuity–immediate with payments of 1, plus a
4–year–deferred annuity–immediate with 4 payments of 1 each:
Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Present Value

Payments 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100a15|
100 100 100 100 100 100ν 10 .a5|
Total 100 100 100 100 100 100 100 100 100 100 200 200 200 200 200 100(a15| + ν 10 .a5
10 1 − ν 15 10 1 − ν5
100(a15| + ν .a5| ) = 100 + 100ν . = 1, 040.89
0.08 0.08
Another approach is to analyze this series of payments:
a 10–year annuity–immediate with payments of 100, plus a 10–year–deferred annuity–immediate with 5 payments of 200 each:
10 1 − ν 10 5 1 − ν5
100a10| + ν .200a5| = 100 + 200ν . = 1, 040.89
0.08 0.08
MA ACTU 371 October 5, 2022 36 / 66

Exercises
Exercise 3: An annuity-immediate has a first payment of 100, and the payments increase by 100 each year until they reach 500.
There are 10 further payments of 500. Find the present value of this annuity at 6.5%.
MA ACTU 371 October 5, 2022 37 / 66

Exercises
Solution:
Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Payments 100 200 300 400 500 500 500 500 500 500 500 500 500 500 500
100(Ia)5| ν 5 .500.a10|
5
PV = 100(Ia)5| + ν .500.a10| = 100(11.9445) + (0.7299)(500)(7.1888) = 3, 817.95
MA ACTU 371 October 5, 2022 37 / 66

Exercises
Solution:
Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Payments 100 200 300 400 500 500 500 500 500 500 500 500 500 500 500
100(Ia)5| ν 5 .500.a10|
5
PV = 100(Ia)5| + ν .500.a10| = 100(11.9445) + (0.7299)(500)(7.1888) = 3, 817.95
Exercise 4: An annuity-immediate has 5 annual payments of 100, followed by a perpetuity of 200 starting in the 6th year. Find
the present value at 8%.
MA ACTU 371 October 5, 2022 37 / 66

Exercises
Solution:
Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Payments 100 200 300 400 500 500 500 500 500 500 500 500 500 500 500
100(Ia)5| ν 5 .500.a10|
5
PV = 100(Ia)5| + ν .500.a10| = 100(11.9445) + (0.7299)(500)(7.1888) = 3, 817.95
Exercise 4: An annuity-immediate has 5 annual payments of 100, followed by a perpetuity of 200 starting in the 6th year. Find
the present value at 8%.
Solution:
Time 1 2 3 4 5 6 7 8 ...
Payments 100 100 100 100 100 200 200 ... ...
100a5| ν 5 .200.a∞| = ν 5 .200. 1i
5
PV = 100a5| + ν .200.a∞| = 399.271 + 1701.458 = 2100.73
MA ACTU 371 October 5, 2022 37 / 66

Exercises
Find the present value of this annuity at 6.5%.
MA ACTU 371 October 5, 2022 38 / 66

Exercises
Solution:
Time 1 2 3 4 5
Payments 100 200 300 400 500
The present value of this cashflow is

PV = 100(Ia)5| = 100(11.9445) = 1194.45
MA ACTU 371 October 5, 2022 38 / 66

Exercises
Solution:
Time 1 2 3 4 5
Payments 100 200 300 400 500

PV = 100(Ia)5| = 100(11.9445) = 1194.45
Exercise 3: Find the present value of a 15year decreasing annuityimmediate paying 150000 the first year and decreasing by
10000 each year thereafter. The effective annual interest rate of 4.5%.
MA ACTU 371 October 5, 2022 38 / 66

Exercises
Solution:
Time 1 2 3 4 5
Payments 100 200 300 400 500

PV = 100(Ia)5| = 100(11.9445) = 1194.45
Exercise 3: Find the present value of a 15year decreasing annuityimmediate paying 150000 the first year and decreasing by
10000 each year thereafter. The effective annual interest rate of 4.5%.
Solution: The cashflow of payments is
Time 1 2 3 ... 15
Payments (15) (10000) (14) (10000) (13) (10000) ... (1) (10000)
PV = 10000(Da)15| = (10000)(94.6767616) = 946767.616
MA ACTU 371 October 5, 2022 38 / 66

Section 2.9: A Single Formula for Annuities with Terms in
Arithmetic Progression
Suppose the first payment in an annuity–immediate is P and the subsequent payments change by Q per period, where Q can be
either positive or negative. If the annuity has n payments, the sequence of payments is:
P, P + Q, P + 2Q, . . . , P + (n − 1)Q
We find the present value for this sequence of payments:
Time 1 2 3 ... n Present Value

Payments P P P ... P Pan|
n−1 n
Q Q ... Q ν.Q.an−1| = ν.Q. 1−νi = Q. ν−ν
i
n−2 2 n
Q ... Q ν 2 .Q.an−2| = ν 2 .Q. 1−νi = Q. ν −ν
i
...
n−1
−ν n
Q ν n−1 .Q.a1| = ν n−1 .Q. 1−ν
i
= Q. ν i
Pn
ν t −nν n a −nν n
n|
Total P P +Q P +2Q ... P + (n − Pan| + Q t=1 i = Pan| + Q i
1)Q n n
add Q ν −ν
i
The present value of this annuity is:
an| − nν n
PV = Pan| + Q
i
MA ACTU 371 October 5, 2022 39 / 66

Another approach to find the present value for the previous sequence of payments is as follows:
P, P + Q, P + 2Q, . . . , P + (n − 1)Q
Time 1 2 3 4 ... n Present Value

Payments P P P P ... P Pan|
Q 2Q 3Q ... (n − 1)Q Q.ν.(Ia)n−1|
PV = Pan| + Q.ν.(Ia)n−1|
än−1| − (n − 1)ν n−1

= Pan| + Q.ν.
i
an−1| − (n − 1)ν n 1 − ν n−1 ν 1 − ν n−1
n−1
= Pan| + Q. ν.än−1| = ν = (1 − ν )= = an−1|
i d d i
an−1| − nν n + ν n
= Pan| + Q.
i
an| − nν n 1 − ν n−1 1 − ν n (ν −1 − i) 1 − ν n (1 + i − i)
n n
= Pan| + Q. an−1| + ν = +ν = = = an|
i i i i
MA ACTU 371 October 5, 2022 40 / 66

Notes:
In the previous formula, if P = 1 and Q = 1, then we have present value of the increasing annuity–immediateis
an| − nν n i an| + an| − nν n

PV = an| + =
i i
(1 + i)an| − nν n
=
i
än| − nν n
= Remember: än| = (1 + i)an|
i
= (Ia)n|
In the previous formula, if P = n and Q = −1, then we have present value of the decreasing annuity–immediateis
an| − nν n i n an| − an| + nν n

PV = nan| − =
i i
n(ian| + ν n ) − an|
=
i
n(1 − ν n + ν n ) − an| 1 − νn n
= ian| = i =1−ν
i i
n − an|
= = (Da)n|
i
MA ACTU 371 October 5, 2022 41 / 66

The present value of an increasing perpetuity–immediate of the form P, P + Q, P + 2Q, . . . :
an| − nν n
lim PV = lim Pan| + Q
n→∞ n→∞ i
a∞| − 0
= Pa∞| + Q
i
P 1 P Q
i
= +Q = +
i i i i2
To develop a formula for the future value of the annuity at time n, we can multiply the present value by (1 + i)n as follows:
(1 + i)n an| − n(1 + i)n ν n

n n
(1 + i) PV = P (1 + i) an| + Q
i
sn| − n
FV = P sn| + Q
i
The present value of this annuity is:
sn| − n
FV = P sn| + Q
i
MA ACTU 371 October 5, 2022 42 / 66

Exercise 3: A 10-year annuity-immediate has a first-year payment of 500. The subsequent payments increase by 100 each year.
Find the present value of this annuity based on an annual effective rate of 5%.
MA ACTU 371 October 5, 2022 43 / 66

Exercise 3: A 10-year annuity-immediate has a first-year payment of 500. The subsequent payments increase by 100 each year.
Find the present value of this annuity based on an annual effective rate of 5%.
a −nν n
n|
Solution: PV = Pan| + Q i
where n = 10, i = 0.05, P = 500, Q = 100.
−10
1 − (1.05)−10 1−(1.05) 10
− 1.05
0.05
PV = 500 + 100 = 7, 026.07
0.05 0.05
MA ACTU 371 October 5, 2022 43 / 66

Section 2.10: Annuities with Terms in Geometric
Progression
A geometric annuity is an annuity where the payments increase geometrically with a common ratio.
For example, consider the sequence of three payments 1, 1.05, 1.1025 = (1.05)2 made at the end of the years 1, 2, 3:
Time 0 1 2 3
Payments 1 1.05 (1.05)2
(1.05)2
The payments increase geometrically with a common ratio of 1.05: 1.05
1
= 1.05
The payments increase geometrically with a growth rate g = 0.05: 1, (1 + 0.05), (1 + 0.05)2
More generally, we can consider an n-year geometric annuity-immediate with growth rate g . Its payments are
1, (1 + g ), (1 + g )2 , (1 + g )3 , . . . , (1 + g )n−1 .
g g
The present value is represented by the symbol a or a . Sometimes present value is represented by the symbol (Ga)n|i,r )
n|i n|
The first payment in the geometric series is 1.
The annual rate of change, g , can be either positive or negative, reflecting payments that increase or decrease geometrically.
MA ACTU 371 October 5, 2022 44 / 66

Progression
Now, we have the following cashflow:
Time 1 2 3 ... n
Payments 1 (1 + g ) (1 + g )2 ... (1+g )n−1
We can express the present value of a geometric annuity-immediate as follows:
g 1 (1 + g ) (1 + g )2 (1 + g )n−1
a = + + + ··· +
n| 1+i (1 + i)2 (1 + i)3 (1 + i)n
1 h 1+g 1 + g 2 1 + g n−1 i
= 1+ + + ··· +
1+i 1+i 1+i 1+i
1+g n
1 1− 1+i 1 − rn (1 + g )
= 1+g we apply the formula: for r =
1+i 1− 1−r (1 + i)
1+i
1 − 1+g 1+g n
n
1 1+i
1− 1+i
= =
1+i (1+i)−(1+g ) i −g
1+i
1+g n
g
1− 1+i
a =
n| i −g
MA ACTU 371 October 5, 2022 45 / 66

Progression
Notes:
g n
If g = 0, then a = 1−ν
i
= an|
n|
If g = i,
g 1 h 1+g 1 + g 2 1 + g n−1 i
a = 1+ + + ··· +
n| 1+i 1+i 1+i 1+i
1 n
= 1 + 1 + 1 + ··· + 1 =
1+i 1+i
For geometric annuities-due:
1+g n
g g
1− 1+i
ä = (1 + i)a = (1 + i)
n| n| i −g
1+g n
1 1 − 1+i 1 1
= . ν = ⇒ =1+i
ν i −g 1+i ν
1 − 1+g n

1+i
=
iν − g .ν
1 − 1+g
n
1+i
= iν = d
d − g .ν
MA ACTU 371 October 5, 2022 46 / 66

Progression
For the future values of geometric annuities:
1+g n
g n g n
1− 1+i
s = (1 + i) .a = (1 + i) .
n| n| i −g
(1 + i)n − (1 + g )n
=
i −g
and
1+g n
g n g n
1− 1+i
s̈ = (1 + i) .ä = (1 + i) .
n| n| d − g .ν
(1 + i)n − (1 + g )n
=
d − g .ν
For the perpetuity,
1+g n
g
1− 1+i
lim a = lim
n→∞ n| n→∞ i −g
g 1−0 1
a = = for i > g
∞| i −g i −g
If g ≥ i, the present value of the perpetuity is infinite.

MA ACTU 371 October 5, 2022 47 / 66
Progression
1+g n
g
1− 1+i
lim ä = lim
n→∞ n| n→∞ d − g .ν
g 1−0 1
ä = = for i > g
∞| d − g .ν d − g .ν
1+g n
g
1− 1+i
a =
n| i −g
g 1 − νn g n
If g = 0, a = = an| and if g = i, a =
n| i n| 1+i
g (1 + i)n − (1 + g )n
s =
n| i −g
1+g n
g
1− 1+i g (1 + i)n − (1 + g )n
ä = and s̈ =
n| d − g .ν n| d − g .ν
g 1 g 1
For i > g , a = and ä =
∞| i −g ∞| d − g .ν
MA ACTU 371 October 5, 2022 48 / 66

Progression
For an annuity–immediate or for future values, you must first calculate the present value of the annuity–due, and then adjust it
by the appropriate interest factor, using (1 + i):
(1)
g
ä 1− 1+g n
n| 1+i
=
1+i (1 + i)d − (1 + i)g .ν
1 − 1+g
n
1+i
= i −g
(1 + i) 1+i
1+g n
1 − 1+i g
= =a
i −g n|
(2)
(1+g )n
n−1 g
(1 + i)n−1 − 1+i
(1 + i) .ä =
n| d − g .ν
(1+i)n −(1+g )n
(1+i)
=
d − g .ν
(1 + i)n − (1 + g )n
=
(1 + i).d − (1 + i)g .ν
(1 + i)n − (1 + g )n g
= =s
i −g n|
MA ACTU 371 October 5, 2022 49 / 66

Progression
(3)
(1 + i)n − (1 + i)n . 1+g

n
n g 1+i
(1 + i) .ä =
n| d − g .ν
(1 + i)n − (1 + g )n g
= = s̈
d − g .ν n|
g
ä
g n|
a =
n| 1+i
g n−1 g
s = (1 + i) .ä
n| n|
g n g
s̈ = (1 + i) .ä
n| n|
Example: Given i = 10%, find the present value of the sequence of payments: 1.05, (1.05), . . . , (1.05)10 . Payments are made
at the beginning of each year.
MA ACTU 371 October 5, 2022 50 / 66

Progression
(3)
(1 + i)n − (1 + i)n . 1+g

n
n g 1+i
(1 + i) .ä =
n| d − g .ν
(1 + i)n − (1 + g )n g
= = s̈
d − g .ν n|
g
ä
g n|
a =
n| 1+i
g n−1 g
s = (1 + i) .ä
n| n|
g n g
s̈ = (1 + i) .ä
n| n|
Example: Given i = 10%, find the present value of the sequence of payments: 1.05, (1.05), . . . , (1.05)10 . Payments are made
at the beginning of each year.
Solution: Note that this series starts with 1.05, not 1, and that payments are made at the beginning of each period with
g = 0.05.
1 − 1.05 10

0.05
(1.05).ä10|0.10 = (1.05). 0.10 1.100.05 = 8.59
1.10
− 1.10
MA ACTU 371 October 5, 2022 50 / 66

Progression
Example: You want to save 1,000,000 for retirement. You plan to make annual deposits at the beginning of each year into an
account that earns an annual effective rate of 7.5%. You will increase the amount of your deposit each year by 4%. If you plan
to retire in 40 years, what should be the amount of your first deposit?
MA ACTU 371 October 5, 2022 51 / 66

Progression
Solution: Let P be the amount of the first deposit.
g (1 + i)n − (1 + g )n
FV = P.s̈ = P.
n| d − g .ν
0.04 (1.075)40 − (1.04)10

1, 000, 000 = P.s̈ = P. 0.075 0.04
40|0.075 − 1.075
1.075
1, 000, 000 = P.(406.756)
1, 000, 000
⇒P = = 2, 458.48.
406.756
MA ACTU 371 October 5, 2022 51 / 66

Progression
g (1 + i)n − (1 + g )n
FV = P.s̈ = P.
n| d − g .ν
0.04 (1.075)40 − (1.04)10

1, 000, 000 = P.s̈ = P. 0.075 0.04
40|0.075 − 1.075
1.075
1, 000, 000 = P.(406.756)
1, 000, 000
⇒P = = 2, 458.48.
406.756
Example: An annuity provides for 10 annuals payments, the first payment a year hence being $2600. The payments increase in
such a way that each payment is 3% greater than the previous one. The annual effective rate of interest is 4%. Find the present
value of this annuity.
MA ACTU 371 October 5, 2022 51 / 66

Progression
g (1 + i)n − (1 + g )n
FV = P.s̈ = P.
n| d − g .ν
0.04 (1.075)40 − (1.04)10

1, 000, 000 = P.s̈ = P. 0.075 0.04
40|0.075 − 1.075
1.075
1, 000, 000 = P.(406.756)
1, 000, 000
⇒P = = 2, 458.48.
406.756
Example: An annuity provides for 10 annuals payments, the first payment a year hence being $2600. The payments increase in
such a way that each payment is 3% greater than the previous one. The annual effective rate of interest is 4%. Find the present
value of this annuity.
Solution: Let P be the first payment.
1+g n
g
1− 1+i
PV = P.a = P.
n| i −g
1− 1.03 10
0.03 1.04
PV = (2600)a = (2600)
10|0.04 0.04 − 0.03
= 23945.54454
MA ACTU 371 October 5, 2022 51 / 66
Section 2.11: Annuities With More Complex Payment
Patterns
Example: The present value of a series of payments of 3 at the end of every eight years, forever, is equal to 9.5. Calculate the
effective annual rate of interest.
MA ACTU 371 October 5, 2022 52 / 66

Patterns
Example: The present value of a series of payments of 3 at the end of every eight years, forever, is equal to 9.5. Calculate the
effective annual rate of interest.
Solution: The 8-year interest factor is (1 + i)8 . So, the 8-year effective interest rate is (1 + i)8 − 1. We have that
1
PV = Pa∞|(1+i)8 −1 ⇒ 9.5 = (3)a∞|(1+i)8 −1 Remember: a∞|i =
i
1
⇒ 9.5 = (3)
(1 + i)8 − 1
8 3
⇒ (1 + i) − 1 =
9.5
8 3
⇒ (1 + i) = +1
9.5
s
8 3
⇒1+i = +1
9.5
s
8 3
⇒i = + 1 − 1 = 0.03489979511
9.5
⇒ i = 3.489979511%
MA ACTU 371 October 5, 2022 52 / 66

Patterns
Example: A perpetuity pays $1 at the end of every year plus an additional $1 at the end of every second year. The effective
rate of interest is i = 5%. Find the present value of the perpetuity at time 0.
MA ACTU 371 October 5, 2022 53 / 66

Patterns
Example: A perpetuity pays $1 at the end of every year plus an additional $1 at the end of every second year. The effective
rate of interest is i = 5%. Find the present value of the perpetuity at time 0.
Solution:
Time 0 1 2 3 4 5 6 ... Present value

Payments 1 1 1 1 1 1 ... a∞| = 1i
1 1 1 ... a∞|(1+i)2 −1 = 1
(1+i)2 −1
The 2-year interest factor is
(1 + i)2 , so the 2-year effective
interest rate is (1 + i)2 − 1.
Total 1 2 1 2 1 2 ... 1 + 1
i (1+i)2 −1
1 1 (1 + i)2 − 1 + i
PV = + = = 29.7561
(1 + i)2 − 1 i (1 + i)2 − 1

i
MA ACTU 371 October 5, 2022 53 / 66

Patterns
Example: An annuity-immediate has a first payment of 100, and its payments increase by 100 each year until they reach 500.
The remaining payments are a perpetuity-immediate of 500 beginning in year 6. Find the present value at 6.5%.
MA ACTU 371 October 5, 2022 54 / 66

Patterns
Example: An annuity-immediate has a first payment of 100, and its payments increase by 100 each year until they reach 500.
The remaining payments are a perpetuity-immediate of 500 beginning in year 6. Find the present value at 6.5%.
Solution:
Time 1 2 3 4 5 6 7 ...
Payments 100 200 300 400 500 500 ... ...
100(Ia)5|0.065 ν 5 .500.a∞| = ν 5 .500. 1i
1 )5
ä5|0.065 − 5( 1.065 1 5 1
PV = 100 +( ) .500. = 1194.45 + 5614.47 = 6808.92
0.065 1.065 0.065
MA ACTU 371 October 5, 2022 54 / 66

Section 2.12: Annuities with Payments More Frequent
than Annual
Example: John invest $500 into an account at the end of each month for 5 years. The annual effective interest rate is 4.5%.
Calculate the balance of this account at the end of 5 years.
MA ACTU 371 October 5, 2022 55 / 66

than Annual
Solution: The number of payments made is (5)(12) = 60.
(1+i)n −1
Remember: FV = P.sn|i = P. i
However, we use
FV = P.s (m)
n×m| i
m
where m is number of payments each year.

(m)
Now, we want to find i m :
i (m) m i (12) 1
(1 + i) = (1 + ) ⇒ = (1 + 0.045) 12 − 1
m 12
The one-month effective interest rate is (1.045)1/12 − 1.
Hence, the balance of this account at the end of 5 years is
((1.045)1/12 − 1 + 1)60 − 1 (1.045)5 − 1

FV = 500.s = (500) = (500) = 33495.8784
60|(1.045)1/12 −1 (1.045)1/12 − 1 (1.045)1/12 − 1
MA ACTU 371 October 5, 2022 55 / 66

than Annual
Example: Find the level monthly payment for a 30-year mortgage loan of 300,000 at an interest rate of 6% convertible monthly.
MA ACTU 371 October 5, 2022 56 / 66

than Annual
Example: Find the level monthly payment for a 30-year mortgage loan of 300,000 at an interest rate of 6% convertible monthly.
Solution: The number of payments made is (30)(12) = 360.
Remember: PV = P.an|i
However, we use
PV = P.a (m)
n×m| i
m
where m is number of payments each year.

(m)
A nominal rate of interest 6% convertible monthly means an interest rate of i m = 6%
12
= 0.5% = 0.005 per month.
We can simply use the usual annuity functions, recognizing that the period is 1 month instead of 1 year:
PV = P.a (m)
n×m| i
m
300, 000 = P.a360|0.005
300, 000
⇒P =
a360|0.005
1 )360
1 − ( 1.005
300, 000
P = a360|0.005 =
166.7916 0.005
P = 1798.65
MA ACTU 371 October 5, 2022 56 / 66

than Annual
Example: An annuity-immediate has 20 initial quarterly payments of 25 each, followed by a perpetuity of quarterly payments of
50 starting in the sixth year. Find the present value at 8% convertible quarterly.
MA ACTU 371 October 5, 2022 57 / 66

than Annual
Example: An annuity-immediate has 20 initial quarterly payments of 25 each, followed by a perpetuity of quarterly payments of
50 starting in the sixth year. Find the present value at 8% convertible quarterly.
Solution: A nominal rate of interest 8% convertible quarterly means an interest rate of 8%

4
= 2% = 0.02 per quarter.
n
PV = P.an|i + ν .P.a∞|i
20
= 25.a20|2% + ν .50.a∞|2%
1
= 25.(16.3514) + (0.6729).50.(50) Remember: a∞|i =
i
= 2091.2142
MA ACTU 371 October 5, 2022 57 / 66

than Annual
Many annuities, such as loan payments or pensions, have more frequent payments (e.g., monthly or quarterly). We will
develop methods for annuities whose payments are more frequent than annual.
(m) 1 at the end of each 1 of a year. For

The symbol an|i indicates the present value of an annuity-immediate that pays m m
(12)
example, consider an annuity that makes 12 payments per year. The symbol an|i is the present value of an annuity that pays
1 at the end of each month for n years.
12
The cashflow value of the annuity-immediate with level payments of one per year and m payments per year is
Time 1 2 3 ... ... n

m m m
Payments 1 1 1 ... ... 1
m m m m
(m) 1 − νn i (m) (1 + i)n − 1 i

an| = = an| , sn| = = sn|
i (m) i (m) i (m) i (m)
(m) (1 − ν n i d (m) (1 + i)n − 1 i d

än| = = an| = än| , s̈n| = = sn| = s̈n|
d (m) d (m) d (m) d (m) d (m) d (m)
(m) 1 1 (m) 1 1 1
a∞| = = , ä∞| = =
− 1 i (m) 1
m 1−νm d (m)
m(ν m − 1)
MA ACTU 371 October 5, 2022 58 / 66

than Annual
MA ACTU 371 October 5, 2022 59 / 66

than Annual
Solution: Remember:
(m) i
sn| = sn|
i (m)
(m) i
FV = P.sn| = P. sn|
i (m)
This implies
0.045 (1 + 0.045)5 − 1
FV = (500) = 33495.8784
(1.045)1/12 − 1 0.045
MA ACTU 371 October 5, 2022 59 / 66

than Annual
Solution: Remember:
(m) i
sn| = sn|
i (m)
(m) i
FV = P.sn| = P. sn|
i (m)
This implies
0.045 (1 + 0.045)5 − 1
FV = (500) = 33495.8784
(1.045)1/12 − 1 0.045
Example: A saver deposits 100 into a bank account at the end of every month for 10 years. If the account earns interest at an
annual effective rate of 6%, what is the savers balance at the end of 10 years?
MA ACTU 371 October 5, 2022 59 / 66

than Annual
Solution: Remember:
(m) i
sn| = sn|
i (m)
(m) i
FV = P.sn| = P. sn|
i (m)
This implies
0.045 (1 + 0.045)5 − 1
FV = (500) = 33495.8784
(1.045)1/12 − 1 0.045
Example: A saver deposits 100 into a bank account at the end of every month for 10 years. If the account earns interest at an
annual effective rate of 6%, what is the savers balance at the end of 10 years?
Solution: Remember:
(m) i
sn| = sn|
i (m)
(m) i
FV = P.sn| = P. sn|
i (m)
This implies
0.06 (1.045)10 − 1
FV = (100) = 16247.344
(1.06)1/12 − 1 0.06
MA ACTU 371 October 5, 2022 59 / 66

Section 2.13: Continuously Payable Annuities With
Continuously Varying Payments
We will address situations where a continuously payable annuitys rate of payment changes continuously.
(A) Arithmetic Annuities
(1) The continuously increasing annuity.
The symbol for the present value of this annuity is (I¯ā)n| .
The bar over the a indicates that payments are continuous.

The bar over the I indicates that the increases in the rate of payment also occur continuously.
At the beginning of the first year (at time 0), the payment rate is 0 and the payment rate at the end of the first year is 1 per
year. It builds up from 0 at time 0 to 1 at time 1, and continues to increase, reaching a rate of n per year at time n.
At any time t, the payment rate is t per year, so the amount paid during a small time interval dt is (t.dt), and the present value
of that amount at time 0 is (t.ν t .dt).
To find the present value of all the payments from time 0 to time n, we integrate this value from 0 to n:
Z n
t
(I¯ā)n| = t.ν dt
0
Using integration by part:
u = t ⇒ du = dt ,
1 −δt
Z
t t
dw = ν dt ⇒ w = ν dt = − e Refer to the continuous annuity
δ
MA ACTU 371 October 5, 2022 60 / 66

t −δt 1
Z Z
t −δt
t.ν dt = − e + e dt
δ δ
t −δt t −δt
=− e − e
δ δ2
t t t t −δt ln(1+i)−1 t t
=− ν − ν e = (e ) =ν
δ δ2
t
−ν 1
= t+
δ δ
This implies
−ν t
Z n
t 1 n
(I¯ā)n| = t.ν dt = t+
0 δ δ 0
−ν n 11 1
= (n + )+
( )
δ δδ δ
n
1 n ν 1
= − nν − +
δ δ δ
1 n 1 − νn
= − nν +
δ δ
1 n

= − nν − ān|
δ
ān| − nν n
=
δ
MA ACTU 371 October 5, 2022 61 / 66
This gives us the formula for the present value of a continuously increasing arithmetic annuity:
ān| − nν n
(I¯ā)n| =
δ
In the case of a continuously increasing perpetuity, we have:
ān| − nν n
(I¯ā)∞| = lim
n→∞ δ
This implies
1
(I¯ā)∞| =
δ2
For the future values of these annuities:
n n ān| − nν n s̄n| − n
(I¯s̄)n| = (1 + i) (I¯ā)n| = (1 + i) =
δ δ
(2) The continuously decreasing annuity.
A continuously decreasing annuity (D̄ ā)n| makes continuous payments at a rate that decreases linearly from n per year at time 0
to a rate of 0 at time n. We can develop a formula for (D̄ ā)n| as follows:
1 − νn ān| − nν n n − ān|
(I¯ā)n| + (D̄ ā)n| = nān| ⇒ (D̄ ā)n| = nān| − (I¯ā)n| ⇒ n. − =
δ δ δ
MA ACTU 371 October 5, 2022 62 / 66

n − ān|
(D̄ ā)n| =
δ
For the future value:
n n n − ān| n(1 + i)n − s̄n|

(D̄ s̄)n| = (1 + i) (D̄ ā)n| = (1 + i) =
δ δ
MA ACTU 371 October 5, 2022 63 / 66

n − ān|
(D̄ ā)n| =
δ
n n n − ān| n(1 + i)n − s̄n|

(D̄ s̄)n| = (1 + i) (D̄ ā)n| = (1 + i) =
δ δ
Example: An annuity provides continuous payments at the rate of 500 per year at time 0, and its payment rate increases
continuously at a rate of 100 per year each year for 10 years. Calculate the accumulated value of this annuity at the end of 10
years, assuming an annual effective interest rate of 10%.
MA ACTU 371 October 5, 2022 63 / 66

n − ān|
(D̄ ā)n| =
δ
n n n − ān| n(1 + i)n − s̄n|

(D̄ s̄)n| = (1 + i) (D̄ ā)n| = (1 + i) =
δ δ
Example: An annuity provides continuous payments at the rate of 500 per year at time 0, and its payment rate increases
continuously at a rate of 100 per year each year for 10 years. Calculate the accumulated value of this annuity at the end of 10
years, assuming an annual effective interest rate of 10%.
Solution: We have two parts:
Part (1): The original payment rate of 500 per year is a level continuously payable annuity, 500s̄10|
Part (2): The increasing portion is a separate continuously increasing annuity, 100(I¯s̄)10|
The accumulated value is:
(1.10)10 −1
(1.10)10 − 1 ln(1.10)
− 10
500s̄10| + 100(I¯s̄)10| = 500 + 100 = 15, 413.20
ln(1.10) ln(1.10)
MA ACTU 371 October 5, 2022 63 / 66

(B) Geometric Annuities
A continuously payable geometric annuity can also have a continuously changing rate of payment. The present value of such an
ḡ
annuity can be represented by the symbol ā , where ḡ is the continuously compounded rate of change in the payment rate.
n|
ḡ
This means that the payment rate at time t is e ḡ t . We can develop a formula for ā by integration:
n|
Z n Z Z n Z n
ḡ ḡ t −δt −(δ−ḡ )t ḡ t δt
ā = e e dt = e dt = ān|δ−ḡ ān| = ν dt = e dt
n| 0 0 0
1 − e −n(δ−ḡ )
=
δ − ḡ
In the case of a continuously increasing (or decreasing) perpetuity, we have:
ḡ 1 − e −n(δ−ḡ ) 1
ā = lim = δ > ḡ
∞| n→∞ δ − ḡ δ − ḡ
The future value of a continuously varying geometric annuity is found by accumulating the present value to time n at the force
of interest, δ:
ḡ ḡ nδ 1 − e −n(δ−ḡ ) nδ e nδ − e n.ḡ
s̄ = ā e = e =
n| n| δ − ḡ δ − ḡ
MA ACTU 371 October 5, 2022 64 / 66

ḡ 1 − e −n(δ−ḡ )
ā =
n| δ − ḡ
ḡ 1
ā = δ > ḡ
∞| δ − ḡ
ḡ e nδ − e n.ḡ
s̄ =
n| δ − ḡ
Note: In some cases, the pattern of continuously varying payments is not arithmetic or geometric, and the interest rate also
varies continuously. In this situation, the present value of the annuity must be expressed as an integral:
Z n
− 0t δs ds
R
PV = ρ(t) e dt
0
t R
where ρ(t) is a rate of payment per year that varies as a function of t and e − 0 δs ds is the present value factor.
MA ACTU 371 October 5, 2022 65 / 66

Example: A 5–year annuity makes continuous payments at a rate of (1000 + 50t) per year. Calculate the present value of this
1 .
annuity at a continuously varying force of interest δ(t) = 20+t
MA ACTU 371 October 5, 2022 66 / 66

Example: A 5–year annuity makes continuous payments at a rate of (1000 + 50t) per year. Calculate the present value of this
1 .
annuity at a continuously varying force of interest δ(t) = 20+t
Solution: Z n
− 0t s ds
R
PV = ρ(t) e dt
0
By substitution, we have
− 0t 1
Z 5 R
ds
PV = (1000 + 50t) e 20+s dt
0
Rt
The present value factor in this expression is e − 0 s ds .
The integral can be evaluated as follows:
Z t
1 t h i 20 + t
− ds = − ln(20 + s) = − ln(20 + t) − ln(20) = − ln

0 20 + s 0 20
The present value factor is
−1
20+t
− 0t 1 20 + t −1 1 −1 1
R
ds ln −1
e 20+s =e 20 =( ) = (1 + t) = (1 + 0.05t) =
20 20 1 + 0.05t
Z 5 Z 5 Z 5
1 1 5
⇒ PV = (1000+50t) dt = 1000 (1+0.05t) dt = 1000 1 dt = 1000 t = 1000(5−0) = 5000

0 1 + 0.05t 0 1 + 0.05t 0 0
MA ACTU 371 October 5, 2022 66 / 66

Financial Mathematics Annuity-Immediate Calculation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Mathematics Annuity-Immediate Calculation

Uploaded by

Copyright:

Available Formats

Financial Mathematics

MA ACTU 371 October 5, 2022 1 / 66

MA ACTU 371 October 5, 2022 2 / 66

The interval between annuity payments is called payments period.

Contributions C0 C1 ... Cn−1 0

MA ACTU 371 October 5, 2022 3 / 66

The future value of an annuity–immediate with level annual payments of one is

MA ACTU 371 October 5, 2022 4 / 66

The future value of an annuity–immediate with level annual payments of one is

MA ACTU 371 October 5, 2022 4 / 66

MA ACTU 371 October 5, 2022 5 / 66

Theorem: If i 6= 0, the present value of an annuityimmediate with level payments of one is

MA ACTU 371 October 5, 2022 6 / 66

MA ACTU 371 October 5, 2022 7 / 66

MA ACTU 371 October 5, 2022 7 / 66

MA ACTU 371 October 5, 2022 8 / 66

MA ACTU 371 October 5, 2022 8 / 66

Example: If n = 15 and i = 6%, find

MA ACTU 371 October 5, 2022 8 / 66

Example: If n = 15 and i = 6%, find

MA ACTU 371 October 5, 2022 8 / 66

The future value of an annuity–due with level annual payments of one is

Now we want to drive an expression for än| and s̈n| .

MA ACTU 371 October 5, 2022 9 / 66

Similarly for s̈n| , we have the following formulas:

Theorem: If i 6= 0, the present value of an annuity-due with level payments of one is

MA ACTU 371 October 5, 2022 10 / 66

Example: If i = 5% and n = 10, find än| .

MA ACTU 371 October 5, 2022 12 / 66

Example: If i = 5% and n = 10, find än| .

MA ACTU 371 October 5, 2022 12 / 66

Example: If i = 5% and n = 10, find än| .

Example: If i = 6%, find ä15| and s̈15| .

MA ACTU 371 October 5, 2022 12 / 66

Example: If i = 5% and n = 10, find än| .

Example: If i = 6%, find ä15| and s̈15| .

MA ACTU 371 October 5, 2022 12 / 66

MA ACTU 371 October 5, 2022 13 / 66

MA ACTU 371 October 5, 2022 13 / 66

MA ACTU 371 October 5, 2022 13 / 66

MA ACTU 371 October 5, 2022 13 / 66

MA ACTU 371 October 5, 2022 13 / 66

MA ACTU 371 October 5, 2022 13 / 66

MA ACTU 371 October 5, 2022 14 / 66

MA ACTU 371 October 5, 2022 15 / 66

Example: If i = 5%, find (1) a∞| (2) ä∞| .

MA ACTU 371 October 5, 2022 15 / 66

Example: If i = 5%, find (1) a∞| (2) ä∞| .

MA ACTU 371 October 5, 2022 15 / 66

Example: If i = 5%, find (1) a∞| (2) ä∞| .

Example: Find the present vlaue of a perpetuity immediate with i = 8%.

MA ACTU 371 October 5, 2022 15 / 66

Example: If i = 5%, find (1) a∞| (2) ä∞| .

Example: Find the present vlaue of a perpetuity immediate with i = 8%.

Solution: a∞| = 1i = 0.08

MA ACTU 371 October 5, 2022 15 / 66

MA ACTU 371 October 5, 2022 16 / 66

MA ACTU 371 October 5, 2022 16 / 66

First, we have to find i.

MA ACTU 371 October 5, 2022 16 / 66

First, we have to find i.

MA ACTU 371 October 5, 2022 16 / 66

First, we have to find i.