Annuities

Certain Period

Fixed Amounts
Regular Intervals Stream of Equal Cash Flows
 Annuities

Fixed Amounts
Certain Period
Regular Intervals Stream of Equal Cash Flows
 Annuities

Fixed Amounts
Certain Period
Regular Intervals Stream of Equal Cash Flows

• Annuity means a fixed sum of money payable or receivable

after every regular intervals ( a month, a year, etc.) for a
certain number of periods.

• Annuities can be defined as a stream of equal periodic inflows

or outflows of cash, over a specified time period.
To be Called Annuity, all the three conditions must be fulfilled -

1. Amount Paid or received must be constant over the

period of annuity.

2. Time interval between two consecutive payments or

receipts must be the same.

3. It should be for a specified Period.

To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment

1 5,000

2 6,000

3 4,000

4 7,000

5 3,000
To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment

1 5,000

2 6,000

3 4,000

4 7,000

5 3,000
To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment

1 5,000

2 5,000

3 0

4 5,000

5 5,000
To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment

1 5,000

2 5,000

4 5,000

5 5,000
To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment

1 5,000

2 5,000

3 5,000

4 5,000

5 5,000

6 5,000

7 5,000

Infinity 5,000
To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment

1 5,000

2 5,000

3 5,000

4 5,000

5 5,000

6 5,000

7 5,000

Infinity 5,000
To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment

1 5,000

2 5,000

3 5,000

4 5,000

5 5,000

6 5,000

7 5,000
To be Called Annuity, all the three conditions must be fulfilled -

Is the following an Annuity?

Year Payment
1 5,000
2 5,000
3 5,000
4 5,000
5 5,000
6 5,000
7 5,000
Annuities

 There are two basic types of annuities.

1.
Ordinary The cash flows occurs at the
end of each period.
Annuity.

2. Annuity
The cash flow occurs at the
Due. beginning of each period.
Let’s evaluate two imaginary annuities offered by Prime bank
and Padma bank, Both are for 4 years, 10,000 taka annuities,
at 10% interest rate. But Prime Bank follows Ordinary annuity
and Padma Bank annuity due-

Comparison of Ordinary Annuity and Annuity Due

Year Ordinary Annuity Annuity Due

Prime Bank Padma Bank

0 10,000

1 10,000 10,000

2 10,000 10,000

3 10,000 10,000

4 10,000

Total 40,000 40,000

• Annuity due starts sooner than ordinary Annuity

• The total amount of each annuity is the same
S
Ordinary Annuity = 46,410
Annuity Due = 51,051

 Let’s Calculate the percentage difference between the

value of the Ordinary annuity and the value of the
annuity due

 It is no coincidence that the annuity due is 10% more

valuable than the ordinary annuity because annuity due
gains an extra year of interest.
• CF represents Cash flows
• r represents the interest rate
• n represent ls the number of payments in the annuity
 Ordinary Annuity Versus Annuity Due

Key differences Ordinary Annuity Annuity Due

• Timing of payments Cash follows occurs at Cash follows occurs At
the end of the period. the beginning of the
period.
• ordinary annuity has one less payment than an annuity due
• Future Value Payments have less Payments have More
time to accumulate time to accumulate
interest, resulting in a interest, resulting in a
lower Future value higher Future value

• Ordinary Annuities are more frequently used in finance

Less Risky Riskier
Because you can Because you have
use the money for to make payments
longer before making immediately
payments
• Suitability Good if one has to Good if on has to
make payments receive payments
Examples Retirement accounts, Rent, Insurance
Interest from bonds etc Premium, etc
 Advantages and disadvantages of Annuity :
Pros:
 • Guaranteed income stream: Provides financial security, especially in retirement.
 • Professional management: You don't need to manage the investments yourself.

Cons:
 • Early withdrawal penalties: Withdrawing money before a certain period can incur
penalties.
 • Lower returns than some investments: May offer lower returns than other investment
options like stocks or mutual funds.
Conclusion:

Annuities are complex and diverse financial products.

They can be a useful tool for retirement planning, but they require
careful analysis and comparison before making a decision.
Any Questions?