Annuities

Dr. Adeel Nasir

Annuity
• a series of equal payments made at regular intervals
• Monthly mortgage payments
• quarterly payments by a company into an employee retirement account
• monthly checks paid by Social Security to a retired couple
Types of annuity
• Ordinary Annuity
• Annuity Due
Ordinary Annuity
• An ordinary annuity is one in which payments are made at the end of
each period
• The payment period is the length of time between payments and the
term of the annuity is the total time needed for all payments
• The total amount in an annuity on a future date is the amount,
compound amount, or future value of the annuity
Annuity Due
• Payment made at the start of each year
Ordinary Annuity
• suppose a firm makes deposits of $3000 at the end of each year for
6 years into an investment earning 8, compounded annually
Present Value of an Ordinary Annuity
• present value was defined as the lump sum that must be deposited in
an account today so that it will grow to the required future value by a
certain date.
Those calculations required the interest rate per compounding period
(i) and the number of compounding periods (n)