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1 Ordinary annuity o 1.1 Proof o 1.2 Additional formula 2 Annuity-due 3 Other types 4 See also 5 References
Also let: P = the principal (or present value). S = the future value of an annuity. R = the periodic payment in an annuity (the amortized payment).
Thus, even an infinite series of finite payments (perpetuity) with a non-zero discount rate has a finite present value.
[edit] Proof
The next payment is to be paid in one period. Thus, the present value is computed to be:
. We notice that the second factor is a geometric progression of scale factor 1 and of common ratio . We can write
. Similarly, we can prove the formula for the future value. The payment made at the end of the last year would accumulate no interest and the payment made at the end of the first year would accumulate interest for a total of (n1) years. Therefore,
. Hence:
, in the bank to grow due to interest. See also fixed rate mortgage.
Also, this can be thought of as the present value of the remaining payments:
[edit] Annuity-due
An annuity-due is an annuity whose payments are made at the beginning of each period.[5] Deposits in savings, rent or lease payments, and insurance premiums are examples of annuities due. Because each annuity payment is allowed to compound for one extra period, the value of an annuity-due is equal to the value of the corresponding ordinary annuity multiplied by (1+i). Thus, the future value of an annuity-due can be calculated through the formula (variables named as above):[4]
(1 + i) An annuity-due with n payments is the sum of one annuity payment now and an ordinary annuity with one payment less, and also equal, with a time shift, to an ordinary annuity with one payment more, minus the last payment. Thus we have: (value at the time of the first of n payments of 1) (value one period after the time of the last of n payments of 1) Formula for Finding the Periodic payment(R), Given A: R = A/(1+(1-(1+(j/m) )^(-(n-1))/(j/m)) Examples: 1. Find the periodic payment of an annuity due of $70000, payable annually for 3 years at 15% compounded annually. R= 70000/(1+(1-(1+((.15)/1) )^(-(3-1))/((.15)/1)) R = 70000/2.625708885 R = $26659.46724 2. Find the periodic payment of an annuity due of $250700, payable quarterly for 8 years at 5% compounded quarterly. R= 250700/(1+(1-(1+((.05)/4) )^(-(32-1))/((.05)/4)) R = 250700/26.5692901 R = $9435.71 Finding the Periodic Payment(R), Given S: R = S\,/((((1+(j/m) )^(n+1)-1)/(j/m)-1) Examples: 1. Find the periodic payment of an accumulated value of $55000, payable monthly for 3 years at 15% compounded monthly. R=55000/((((1+((.15)/12) )^(36+1)-1)/((.15)/12)1) R = 55000/45.67944932 R = $1204.04 2. Find the periodic payment of an accumulated value of $1600000, payable annually for 3 years at 9% compounded annually. R=1600000/((((1+((.09)/1) )^(3+1)-1)/((.09)/1)-1) R = 1600000/3.573129 R = $447786.80
Fixed annuities These are annuities with fixed payments. They are primarily used for low risk investments like government securities or corporate bonds. Fixed annuities offer a fixed rate but are not regulated by the Securities and Exchange Commission. This type can be adversely affected by high inflation. Variable annuities Unlike fixed annuities, these are regulated by the SEC. They allow you to invest in portions of money markets. Equity-indexed annuities Lump sum payments are made to an insurance company. Can be implemented with a Call option.
Annuity (financial contracts) Perpetuity Life annuity Fixed rate mortgage Amortization calculator
[edit] References
1. ^ Gibson, Eloise. "Explaining Annuities". Business Day. Retrieved 05/09/11. 2. ^ Lasher, William (2008). Practical financial management. Mason, Ohio: Thomson South-Western. p. 230. ISBN 0-324-42262-8. 3. ^ http://www.americanchronicle.com/articles/yb/157187005 4. ^ a b Finite Mathematics, Eighth Edition, by Margaret L. Lial, Raymond N. Greenwell, and Nathan P. Ritchey. Published by Addison Wesley. ISBN 032122826X 5. ^ Jordan, Bradford D.; Ross, Stephen David; Westerfield, Randolph (2000). Fundamentals of corporate finance. Boston: Irwin/McGraw-Hill. p. 175. ISBN 0-07231289-0. View page ratings Rate this page What's this? Trustworthy Objective Complete Well-written I am highly knowledgeable about this topic (optional) Categories:
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