1.9.

1 Annuity-Immediate

Definition. An annuity may be defined as a series of payments made at

equal intervals of time.

Examples: Home Mortgage payments, car loan payments, pension

payments and interest payments on money invested.

 An annuity – certain is an annuity such that the payments are made for a
fixed (finite) period of time, called the term of the annuity. An example is
monthly payments on a 30-year home mortgage.

 A contingent annuity, is an annuity under which the payments are not

certain and are made until some event happens. An example is monthly
pension payments which continue until the person dies.
 The interval between payments (a month, a quarter, a year) is called
the payment period or period.

Types of Annuities

 Annuities-Immediate
is an annuity in which payments are made at the end of each period.
It is also called an ordinary annuity or just an annuity.

 Annuities-Due
is an annuity in which payments are made at the beginning of each
period.
 If the annuity starts at time t = 0, an annuity-immediate provides the
first payment at time t = 1, and an annuity-due provides the first
payment at t = 0.

Annuities-Immediate
Consider the annuity where payments of 1 are made at the end of the
period for 𝑛 periods.
Let 𝑖 denote the interest rate per period. Since the first payment occurs one
period after inception it has a value at inception (t = 0) of :

1 1
1∙ = = 𝑣.
1+𝑖 1+𝑖

The second payment will be delayed two periods and so has a value of 𝑣 2 ,
and so forth. The total value at inception of this annuity is given by the sum
𝑛

𝑣 + 𝑣2 + ⋯ + 𝑣𝑛 = ෍ 𝑣𝑖 . (1.6.1)
𝑖=1

Equation 1.6.1 occurs so often and it is the present value

of the annuity at time 0 denoted by or simply .
Recall the geometric series:

(1.6.2)

Using Equation 1.6.2 with 𝑎 = 𝑟 = 𝑣, we have

Present Value (PV) of an Annuity-Immediate of 1 per period for
𝑛 periods:
(1.6.3)

The Value at Inception(PV) of an Annuity-Immediate of 𝑛

Payments (made at the end of each period) of 𝑅 at Interest
Rate 𝑖:

(1.6.4)
The accumulated value of all the payments of an annuity just after the
𝑛𝑡ℎ payment is made is denoted by or simply

To compute , we use the formula developed previously:

The Accumulated Value (FV) of an Annuity-Immediate of 𝑛 Payments

of R at Interest Rate 𝑖 just after the last payment is made:

(1.6.5)
Relationship between and

(1.6.6)

The we have
To summarize,

(1.6.7)
Example 1.
Calculate the present value of an annuity-immediate of amount $100 paid
annually for 5 years at the rate of interest of 9%. Also calculate its future
value at time 5.

Solution:
The present value of the annuity is

𝑃𝑉 =

The future value of the annuity is

𝐹𝑉 =
Example 2.

Find the present and accumulated value of an annuity which pays $450 at
the end of each quarter for ten years. The rate of interest is 4.5% per
quarter converted quarterly.

Solution. Since interest is converted quarterly we count in quarters.

1
We then have 𝑣 = and 𝑛 = 10 ∙ 4 = 40. Hence:
1.045
Example 3.
A man wants to save $100,000 to pay for his son’s education in 10 years’
time. An education fund requires the investors to deposit equal installments
annually at the end of each year. If interest of 7.5% is paid, how much does
the man need to save each year in order to meet his target?

Solution: We first calculate , which is equal to

Then the required amount of installment is

Example 4.

For a given interest rate and

(a) Calculate 𝑖:
(b) Calculate 𝑛:

Solution.

(a)

(b)
 Your time!!!

1. On March 9, Mike joined a Christmas club. His bank will automatically

deduct $210 from his checking account at the end of each month, and
deposit it into his Christmas club account, where it will earn 5.25% annual
interest. The account comes to term on December 1. Find the following:
a. Find the future value of Mike’s Christmas club account.
b. Find Mike’s total contribution to the account.
c. Find the total interest earned on the account.

2. A family wishes to accumulate $50,000 in a college education fund at

the end of 20 years. If they deposit $1000 in the fund at the end of each of
the first 10 years and $1000 + X in the fund at the end of each of the
second 10 years, find X to the nearest dollar if the fund earns 7% effective.
The end..Thank you…