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annuity

Page history last edited by PBworks 15 years, 9 months ago

Annuity

a level stream of regular payments that lasts for a fixed number of periods

examples: leases, mortgages, pensions

Formula

PV = C((1/r) - (1 /(r*(1+r)^t)))

example: $100 a year for 20 years. If the interest rate is 8%, then

PV = $100 * (1/0.08 - 1/(0.08(1.08)^20))

PV = $100 * 9.8181

9.8181 = Annuity factor

Using Tables

Look up in annuity tables to find the annuity factor 9.8181

Notes:

Annuity formula / or tables...values the annuity as of one period prior to the first payment. So, if there are 5 payments from year 10 -15, then if you value that annuity, it takes it back to year 9 valuation. (one year prior).

Annuity in Arrears = normal annuity that begins at the end of year one. So, as mentioned above, the formula / tables gives an annuity factor that calculates the value back to time = 0, or one year prior to first payment.

Annuity in Advance, is atypical, and is when the first payment occurs at the beginning of first year. If you are calculating an annuity in advance, then you should treat it as two separate problems. Think of it as an annuity in arrears for all later payments, and then just add it to the first payment at t=0.

Growing Annuity

more difficult

Calculator

formulas 01.xls

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