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Basic Finance

By: Narciso Isidro Jr., MBA

What is Annuity

An investment contract with an insurance company.

A financial product that is designed to pay out a steady amount of


cash over time.

Annuities are generally used as a retirement vehicle to ensure regular


income in later years.

Buying annuity means agreed to pay for lump sum or make a


scheduled deposit to a financial institution (Insurance company).

Continues payment (20 years) or until you or your spouse died, this
payment is called distribution.

Choosing an annuity depends on the income you want in retirement


and the amount of risk you are willing to take.

The goal of any annuity is to provide a stable, long-term source of


income for the annuity holder.

4 main types of annuity

Fixed Annuity

Fixed Interest for a defined period of time

Variable Annuity

Stock Market Risk


Stock Market Reward
Death Benefits

Fixed-Indexed Annuity

Immediate Annuity

Works like a pension

Present and Future Value

Present value is the value of an expected income stream determined


as of the date of valuation.(PV) also known as Past Value.

Future value is the value of an asset at a specific date.(FV)

Ex: PV?

6% IR (r) for 7 Yrs (n) DP to Bank

Formula:
PV = FV (1+r)
Present Value is todays value of a future cash flow.
$100 today > $100 future

FV $100

Compound Interest

Compound interest, interest that increases exponentially over


subsequent periods, Compound interest is interest added to the
principal of a deposit or loan so that the added interest also
earns interest from then on. This addition of interest to the principal is
called compounding.

A formula for calculating annual compound interest is as follows:

Economic Uncertainty

Economic uncertainty implies the future outlook for the economy is


unpredictable. When people talk of economic uncertainty, they
usually imply there is a high likelihood of negative economic events.
Economic uncertainty could involve.

Predictions of a higher and more volatile inflation rate. (inflation


uncertainty)

Concerns over economic downturn lower economic growth or fullblown recession (negative economic growth)

People fear the prospect of being made unemployed.

Concerns over prospects for exchange rate e.g. rapid devaluation in


currency.

Concerns over government borrowing e.g. markets unwilling to


finance more debt, leading to default.

Causes of Economic Uncertainty

Supply Side Shock. A rise in oil prices or rise in commodity


prices would cause an increase in the cost of production
for firms. This would cause cost-push inflation. A supply
side shock can lead to stagflation a combination of
higher inflation and lower economic growth. A supply side
shock can be difficult to deal with (e.g Central Bank cant
solve inflation and lower growth by changing interest
rates. Interest rates can either target lower inflation or
higher growth but not both at same time.

Demand Side Shock. A global economic downturn will have


a strong impact on reducing growth in all countries. For
example, if the EU enters into a recession, it will affect
UK exports and UK economic growth.