Annuities By strict definition, the word “annuity” means “an amount payable annually”. More specifically, an annuity refers to a contract offered by insurance companies which allows you to save funds for retirement on a tax-favored basis and then, if you choose, receive a guaranteed income payable for life or for a certain period such as five or ten years. Annuities are also classified by dates. An annuity in which the payments are made at the end of each payment period is called an ordinary annuity, whereas an annuity in which the payments are made at the beginning of each period is called annuity due. =A — e (Ordinary Annuity) The future value S of an annuity of n payments of R dollars each, paid at the end of each investment period into an account that earns at the rate of | per period, isFuture Value of an Annuity, Then the total amount of the annuity after n payment period is n SER ER Het R= DR i = R14)" + R14)" + ut R = R[1 + (14i) +(14i)? +. + (14/)"1] The expression 1 + (1+/) + of a geometric progression + (1+:)""1 is the sum lerms 1-r" Sy= V4 ry try tee and r=1+iFuture Value of an Annuity (Ordinary Annuity) (Cont...) As a result, 5 =| Ue) gf eor at 1-—(_+i) Ife nos Future Value of an Annuity (Ordinary Annuity) (Cont...) : d+ /)"-1 S= a] i | S = sum arising in the future R = periodic payment paid at the end of each periods n = number of interest bearing periods n=mt m = compounding frequency t = time period r = annual rate / nominal rate i = periodic rateFuture Value of an Annuity (Ordinary Annuity) (Cont...) Example: 2.6.1.1 Find the amount of an ordinary annuity of 12 monthly payments of RM 100 that earn interest at 12 percent per year compounded monthly. = RM 1268.25Future Value of an Annuity (Ordinary Annuity) (Cont...) Example: 2.6.1.2 Find the amount of an annuity consisting of payments of RM 50 at the end of every three months for three years at the rate of 6 percent compounded quarterly.Future Value of an Annuity Ordinary Annuity Example: 2.6.1.3 Suppose RM 100 is initially placed in a savings account and RM 100 is deposited at the end of every six months for the next four years. If interest is at 7 percent compounded semiannually, how much is in the account at the end of four years? S, = 100(1+0.35)® = RM 131.68 0.07.5 (1+—)'-1 =RM 905.17 S = RM 131.68 + RM 905.17 = RM 1,036.85Future Value of an Annuity Due The future value S of an annuity due of n payments of R dollars each, paid at the beginning of each investment into an account that earns interest at the rate of i per period, is s$ $$ s $ -4+++_++++——__+ + | ReRA+hrt RRO +i) ReRA+NFuture Value of an Annuity Due (Cont...) S = R(14i)" + R(14i)"1 + 0... S=RU+ pp ere Ll + R(1+2)Future Value of an Annuity Due (Cont...) Example: 2.6.2.1 An annuity due of three annual payments of RM 12,000 is invested in a fund that pays 12 percent. (1+0.12)3 0.12 S=12,000(1 +0. 2 = RM 45,351.94