Level annuitiesInthe next two chapters we wit lar how to acute the present valve of seriesof payments ‘We wa also meet some actuarial symbol represeting compound interest functions, which we Wil use very frequently in this couse Terminology ere sa brit summary ofthe te terms that we wil use: ‘A annuity i regular series of payments. An annuity certains an anuity payable fora dette _erodoftime: the payments 6 not depend on some factor, suchas whether a persons ale or payments are made atthe ec ofeach time period they are pal n rears. they are made at the Beginning ofeach time pera, they are palin odvance. An annuity pad in advances also known aan annuitpdue Where the fist payment mace during the fist tne period, this an Inmedlateanuity. Where ro payment are made dur he fs ime peo, this dfered annuity each payments forthe sameameunt, his isa lve annuity. I payments increase (decrease each time by the same amount, ths a simple creasing (dereesing) anny. ‘o,for example, payments of £2 made atthe start and halfway trough each ofthe noe five years ‘canbe described asa lve immediate annuity payable halt-yearyn vance for five years ‘Thischapter covers level annites—bothimmeslate and deferre. Chapter then covers increasingand decreasing antes, and ultimately deals with variable payments that can be ‘evaluated using sar techniques to the ones detaled here‘2t08 nti, nes 1.1 Payments made in arrears Consider series of n payments, each f amount to be made at time Intervals of one unt, ‘tho fist payment being made at time ¢ +1. 14 e000 0 bbe e2 tet tem Time Such a sequen of payments i ilustrated in tho diagram above, ln which the rth payment Is madeattime t+ ‘The value of his sr denoted by 65). of payments one unt of te bofro th ist payment is mace ie So,inthe above example, ¢ isthe vale at time ¢ ofthe payments shown. ‘The symbol a3 (pronounced ‘AN. represents the present value ofan anny consisting of” ‘yents oF unt mad atthe end of ach ofthe next ime prods. This ale an anit paid Ctoary, iF =0, then s;)=m5 otherwise: auto waet wetcw) a) ‘he derivation above wes the fac thatthe terms onthe ight-hand ie ofthe st equation form ‘a geometic progression, zo we can ure the formula forte um ofthe fst terms of poometrc progression:‘A alternative way prove res (1.3) to multiply the fest equation through by (+) so that v? becomes vet. Thighs sres very inl tothe original eis, We en then obtain forma {or aq by subtracting the two equations: ag vivian tay (uammgative PoP eons Was 918 dane tobe 20, “Thus 45s tho valuo atthe star of any prod of length n ofa series of m paymonts, each of ‘amount tobe made in arrears at uit tine intervale over the period. tis eomman to refer to ‘uch a gviee of paymont, mde in arrears, a8 an inmadate annuly-cortan and eal i, the presont valuo ofthe inmate annuly-cetaln. When theo leno possibilty of confusion with a fe annuity (ia series of payments dependent onthe survival of one or more human vos), the tr annuity may bo used as an altative to annuly-crtal, called an immediate anit eventhough the fest payments made at the end ofthe fst time period, and hence not Sinmeditaly. mmeate annuities are annultis where the fest payment is made during theft tine perio, including atthe endothe period. Ifno payments are made ding the fist tine period then the annuity deferred. Deferred annules are ‘covered n Section 7. Inthe Tables, values of e aretabulated at various interest rats from ¥t0 25%. For example, the value of ey clelated at 6 interests ven on page 56 of the Tables as 8.2209. We con ‘vey his using the formula obtained above: Wecan denote og cleulted aa rate of interest of effective 35 8, ery, OF FyEB) 12 Question ‘calculate the prevent ve 2 at 1 March 2020 ofa series of payments of 1,00 payable onthe ‘rt day of each month rom Ape 2020 to December 220incse asuminga ate of terest of ‘%pacomertble mntiy Solution Payments made in advance ‘Now consider eres cn payments made atthe start of ech time period as representedon the timeline below. The fist payment ismade atime zero andthe as at time 0. eer 1 Payment i o 1 2 38 at Time “The value ofthis saris of paymont att tne the frst payment is made is denoted by 8. The symbol dg is pronounced ‘Adve 11-0, thon y= others amt agotever (1) ‘Again the derivation ofthe formula above uses the fat thatthe terms onthe ight hand side fozm a geomet progression wth fest term 1, and common tio V.‘Thus ij sth value atthe start of any given period of longthm ofa soros of n payments, ‘ach of amount 1, to be made in advanco a unit timo intervals ver the period. itis ‘common to refer to such a series of payments, made in advance, as an annuly-due and to al the prosont value of he annuity due Ie foltows directly trom the above detntions that: (sea, for n22: (3) ayat ey ‘The fist ofthe equations (3.8) can be obtained by reasoning thatthe payments for iy correspond ‘actly with those foro exept that each payment is made one year eal, fe each payment has present value thats greater bya factor of +). So = 0 +l -Aernativay, sine (27 _ we can obtain th igebralcaly stn aheset sna have =intieg ‘The second ofthe equatons (1.3) can be obtained by noting that i, which isthe PV atime ‘00 ofasris of payments ott payable at times ¢=0,12...,2—1, ithe ames + amin payment of [whlch has a PV of) pus + aseres of payments o3, payable at tines so figaayt4 ‘Atesnativel, algebrecay, wehave: Prod L (ich has aPV of ==) tivated tetacy % Question Caleta a3 and a using an interest rte of 1349 po effective, Solutioncone te nat 7 “Tho value of tho soris of payments atthe tne the ast paymont fs made ls denoted by 85. The value one unit of time after the last paymont is mado sdonotea by & nother words, 5 consider the same series of payments 35 but Its the accumulated value attime 2 opposed tthe present value atte. Silay, ithe accumulated vale at ‘nen of the annul we lacked at above when detning d,s shown on the timeline: a a Value 101 1 1 Payment eee o 1 2 - rtp Tine 11-0 then 55 ~ =n otnernise ENP SADE EIS Goo a tenag (ents 7 iT Fa an: ea) Thus 5) and are he values atthe end af any peti of ength no a series of payments, each of amount 1, made at unite Intervals over the period, whore the payments are made inarears and in advance respectively. Sometimes s;; and 5; aro ‘allod the ‘accumulation’ (or the ‘accumulated amount) ofan immestate annuity ane an snnuiy-due respectively. When =D, 2, and 8 are delined to be zoo. Its an Immediate consequerce ofthe above definition that setteneg and that: oma y= eaeat(Bp cession Caleulate 555 andy usingan intrest rate of 349% pe effective, Solution8) Continuously payab LLetmboa non-negative number. The value atime 0 of an annulty payable continuously ‘between tine 0 and thn n, ware the rato of payment por unit timo ls constant and equal to ‘hls denoted by 3 ‘isisa mathemati ieatsation, which makes calculations easier, With continuous payable annuity, the payments re consiered as continuous aslow thats payable ata ven rat over 3 ‘ven period of tine. The symbel J Isprenounced’ bar. We cn obtain formu for 3g using the formula for he present value of a continuous payment stream we met in Chapter 7. teary: (avo) an Note that 3 8 defined even for nonintgral values of. M80 (or, equivalently, /=0), 4, lwot course equation. ‘Since equation (3.1) ay bo weit a: Itfolows immeciatly ha, nis an integer: agate 1800) ‘Note that hiseationsip can be very useful especialy when sing the Tables, Although values of @ are not tabulated, values oy and iar. “The accumulated amount of such an annuity atthe time the payments. bby + By definition therefore: see By -tte0"%,a Question ‘A payment of E1 sade atthe begining ofeach wee for 1 year, ‘by approximating these weely payments as» continuously payable annuity, nd assuming that ‘there are 52:18 weeks ina yar caleuate the present value of these payments using an effective rate offnterest of po Solution Notice the smiaty between the formulae forthe present and accumulated values of annul: ww mek" co usa o “The mumeratrs are alveys corstent the ony elifferoncebetwoon the formule iin the denominators.@ 4.1 Present values ‘Annuities payable pthiy Where annuity payments ae made p timesa year (eg p=12 fora monthly annuity), a supercit(o sald in he top ight hand corer of the symbol. The annuity stil payable for m years and sil refs to total annual amount of tut ethe anulty consists of mp yments, each of mau 1 p nits. Hand nae postvelntges te nota al? ued dante th vas at tine ofa tovel annuity payable tly in acear atthe rate of 1 par unttime over he time intra {on}. For this annuly the payments are made at times 4/p.2/p.3/p..0 and tho amount of ‘each payments Yp. By definition, a series of p payments, each of amount /!/p in arrears at ptly subintervals ‘over any unit tine interval, has the same value as a slngle payment of amount atthe ond of ‘tho interval. By propetion,p payments, each of amount 1/p Inarrears a pthy ‘subintervals over any unit tin interval have the same value asa single payment of amount 4) atthe end of the interval ‘Consider now that anauity for which the presont value al. The remarks Inthe preceding paragraph show thatthe p paymonts aftr tine rt and nt ater than time r nave the same valuo 8a single payment of amount Hi? atte r. This Is tue for 2, 8, 80 th annuity has the same value asa series of n payments, e2ch of amount 1, tsi 4,2, This moans that: “i 1) a an, [Note that (/(” is tabwated in the Tables and so of! can quickly be calculated for some interest rates ylokng wp thevaies of and. ‘An altorative approath, from rst principles, is towrl Serpe P| on? which cotims equation (41).‘haf tne nthe above derhatlon uses the formula forthe sum ofa geometric progression of _np tecms, with fest tec 24§* and common ratio v/ ? Question Calate of32¥% po, bath and witout sng the Toles. Solution ine 9 tothe present valu oa evel anuity-due payable ply at the rat of pr anit tine overt tine nore fn. (The annuity payments, each of amount “Yp, are mado aimee 0,9, 2/0. VP)) ‘A sores of p payments, each of amount ap, i advance at ply subintorvals over any ni timo intrval has th same value asa single payment of amount Fat ond of the interval. Honco, by proportion, p payments, each of amount fp in advance at pthly subintervals, have the some value a8 single payment of amount el atthe ond of he Interval. This ‘means (by an Kenta argument to that above) that: 9 -gloea ws Alternatively, rom fst principles, we may wrt ap Steve a ay {on simpfication), which coniems oquation (3). ‘The simplification referred to here volves using the formula fr the sum ofa geometric progression of rp terms, with rst term 7 and common ratio v4,ct ates rae Noto that: aia ais ro) rose vy expression beng equal uation (15) can be dived by general easning. The payments orf) conespond actly with those for of, xt that each payments made pre of eng ip err, e ech povient has present au that grater factor of +1. so i (heal, whichis cequbalent to equation) ‘Note that, since: tim = tina) = ‘tfotows immediatly rom equation (4.2) and (44) that Question Caleuat the present vate as at 1 January 2019 of series of payments of £100 payable on the first day ofeach month during 2020, 2021 and 2022, assuming an elective rate of interest of per annum, Solution42 Accumulations Simitaty, we deine sf and 3 tobe the accumulated amounts ofthe corresponding ‘thy immeate annuity and annuity-due respectively. Thus 2 castle tsa yay 1 “be Using the forme fo 5 oes » (usa? om Ao: a ts oo oe oresy wt gaa Again, using the formula for 5 ges: asta gy ‘As previously, notice the sinilaty between the formulae forthe present and accumulated values of aot: so) a spa oot ‘The numerators are always cosstent- the only iference between the formulaesin the denominators. Question Anlovestnent manager has ested 1,000 in a fhacnterest secur that pay Interest of £40 atthe end ofeach halfyear. Inaditon, the ul 1000s eturned on redemption in 12 yeas time. The investment managet depos allof the proceeds fom the security ing bank account ‘that pays an effective rate of ieerest of 8% po. Calculate the amount of moneyin the bank acount after 10 years.Solution “The above proportions! arguments may be applied to other varying series of payments. Consider, for example, an annuity payablo annualy in arrears form years, the payment in ‘the th year being ¥. The present valuo of ths annuity is obvicusly: aS! us) Consider now asecord annuly, lee payable form years with the paymentin tho ¢th yar, ‘again of amount x; ving made in p equal instalments in arrears over that year. i al”) ‘denotes th present vluo ofthis second annuity, by replacing the p payments for yar {each of amount x:/p] by 8 sing equivalent payment atthe end ofthe year of amount aif), wo immeatatoly obtain; 1 wah where als glen by euation (46) above. Question Aseres of payments ofS at time 1, $4 atime 2, $9 atte 3 and s0 on up to $100 at time 10 hha present vale of $45.22 when evaluated at an effective Interest at of 6% pa. Caleulat the present value ofthe series of payments If insteod of being pai at the end of ach ven, each annual amount ispitint three equainstalmnts pad atthe end of each tir of a ve. Solution43 ‘Annuities payable pthly where p <1 1 p< then wear conseing an annuity payable ess equeny than annual, For example, if 905, te ants pate every two yer. The emule for of ant ft! are sia for pst In Section th eymbot al wos inode _ptoboan integer greater han 1 and assumes thatthe product np Is als an integer (This of course, wil be tue when tse a integer, ut one might, for example, have = 4 ‘and =875 s0 that p=23 ) Thon al?! danotos the value at tine 0 of np payments, each ‘ofamount Yp, st times 4/p,2/P,~»,(mplip- ively, with thle notation one contd Non integer values of wilbelooked t more clorly nthe next seton. From atheoraial viowpointitie parhane wort noting that when pi the racroca of an Integer and mp i leo an integer (eg ven p=025 and =28),o— stil ives the vale attime 0of np payments, exch of amount Vp, attimes 4p, 2, npl/e- For example, the valu at tins @ of a seros of sven payments, each of amount 4a times 4, 8,12,,,28 may be denoted by al ‘A fliows that this value equals: ty (wasyaen This lst expression may be wrtn nthe for: ‘though al22 can be written inthe frm immediatly above, itis unliely that we would ever choose todo‘o.tegervalies of Let po a positive intgor. Unt nov the aya al) hasbeen deind oly when nia postive integer. For certain nonintgel values of nth symbol al! has an intulively obvious interpretation. For example, It not lear what meaning, any may be given to ‘yy, but the symbol of), ought to ropresentthe presen vals of an mmelate anny of 4 por annum payable quately in aeons for 05 years atta of 98 quater payments, ‘ach of amount0.28). Onto other hand, alg, has no obvious meaning. Suppose that nis an integer multiple of Vp, sey n/p, where ris an integer. In tis case ‘wo detine al! to beth value at tine 0 ofa series ofr payments, each of amount, at times ‘Yo, 2/0, 3/p..atlp=m. 1-0, then clearly of? =. 0, then ‘The derivation above uses the formula for the sum ofa geometric progression of r terms with Airstream v¥ and conenon ati v/ faa Hho ior 1) 1-0 ‘The standard formula foro therefore apis for non integer values om when nis an inter mute of 2 ,[Note that, by working in terme of a new time unit equal to t times the original time unit and 0 win estate pn a srt ap atte 1)= Lop arate My ‘stom atten saa ttn Question Cota ft event 119.618 Solution Note that te detton of of sven by equation (5.1) 8 mathematical meaning for a nonnegative values of n. Fo: our present purpose therefor, ts convenient to adopt equation (5) a detnton ta oral Tiss only a mathematical éfnition, its not easly translated Int the present value of series of payments. nis notan integer mutpt of +, there is no universally recognised definition ofa) b For example, it n=n, +f, whore, isan integer multiple of Yp and 0 egy Dg gy mia Re amen v eV aV en a¥m) Umea y vty ‘Tho last two equations show that aca oy and: aq ¥ 5, ray Either ofthese two equations may be used to determine the value ofa deferred immeiate annuity. Together thoy imply that fama tag “his formula coud easy be desuced using general easoning. The present value ofa series of (o-+) payment of one unt payable a the end of sch time period ie equal to the sum of (6) the present valve of mpaymensof one unit payable atthe endo ech time period, end (b) the present value of payments of one unit payable a the end of each time period, ‘efered for myears. {Question Using both equations (7.4) and (7.2, caeuate the value of go using an Interest ate of 62% po convertible half. yeaty,Solution Wo may dofne the comespondingdefore annuity due as: ant Va Since iy ~(1+ Neg rem equation 2.3}, we can aso we ig VE Fog 0 7.2 Continuously payable annuities mis non-negative numbor, we use the symbol 9 t denote the present value of continuously payable annuity ft per unitfor n time units, deferred form me units. Thus: tafe73 Question ‘Analien on the planet Xils current aged exactly 48 years old. When the allen retires at exact age 60, til receive an income of 500 per yea, payable continuously ‘Given that allaliens onthe planet Xi dea exact age 76, caleulate the present value ofthe ‘etiement benefits using an irtorest rate of 10% preffetve. Solution ‘Annuities payable pthly ‘The present values ofan immediate annulty and an annulty-duo, payable pthly atthe rate of 4 per unit time for nto units and deferred form time units, are denoted by: wy respectively. Question Caeulte go and use an interest rat of 5% po eect and expla why the value of 02 fiche. Solution7.4 Nominteger values of Wi may sso exon th definitions of af? and ql tall values of bythe form on ra a laa _ onl “ ‘This s easy proved: ve wf and silty for 7.5 Sudden changes in interest rates We considered sudden changes in ntrestrate for single payments eaerin the course. We now conser the impact changes interest ates on a seis of payments. This wolves the se of deferred annuities. Eq] Question i) Caelatethe present vue as at 1 January 201 of payments of £100 onthe est dayof ech ‘quarter during calendar years 2021 to 2030 incisive. ‘Azure the effective rite of interests 8% per annum unt 31 December 2028 and 6% per aur thereat.Solution