Time Value of Money-

Annuity

Puneet Maheshwari
 • It is series of cash flows (payments or
receipts)

• Cash flow of same value

• Occurring at regular intervals.

What is • E.g- Premium of Insurance Policy

Annuity Two kind of Annuities-

Ordinary Annuity or Deferred Annuity

When the cash flow occur at the end of each
period

Annuity Due-
When the cash flow occur at the beginning of
each period
 E.g.- Suppose you deposit Rs1000 annually in a bank for 5 years and
your deposits earns a compound interest rate of 10%. What will be
the value of this series of deposits (an annuity) at the end of 5 years.
Assuming each deposit occurs at the end of each year.
Deposit

1000 1000 1000 1000 1000

Ordinary or
5% 5% 5% 5%

0 1 2 3 4 5

Deferred years

=1000 (1.10)^4 +1000(1.10)^3+1000(1.10)^2+1000(1.10)+1000

Annuity =1000(1.464) +1000(1.331) +1000(1.221) +1000(1.1.) +1000

=6105

=1000 [(1.10)^5-1] / 0.10

 =1000 [{ (1.10)^5-1} / 0.10 ] (1.10)

Annuity Due 1000 1000 1000

Deposit

1000 1000
5% 5% 5% 5% 5%

0 1 2 3 4 5

years

=1000 (1.10)^5 +1000(1.10)^4+1000(1.10)^3+1000(1.10)^2+1000(1.10)

=1000(1.6105) +1000(1.464) +1000(1.331) +1000(1.221) +1000(1.10)

=6715
 Present Value of Annuity

Ordinary Annuity Annuity Due

 Doubling Period

Rule of 72 Rule of 69

Approximation More accurate

method method

= 0.35 + (69/r)
72/ r

E.g- Doubling period is calculated for two interest rates 10% and 15%

10%= 72/10 =7.2 years 10%= 0.35+ 69/10 =7.25 years

15%= 72/15 =4.8 years 15%= 0.35+ 69/15 = 4.95 years