Scribd Logo
Upload

Welcome to Scribd!

  • 38 views

    Example of A Short-Term Annuity

    Uploaded by

    zakibrant23
    An annuity is a series of regular payments made into an account that earn compound interest. There are two types of annuities: ordinary annuities where payments are made at the end of each period, and annuity due where payments are made at the beginning of each period. Sinking funds are a type of annuity where the future value is a specific amount, often used to save for large expenses like education or a down payment. Formulas can be used to calculate the future value, payment amount, or present value of an annuity based on interest rate, number of periods, and payment or future values.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd

    Example of A Short-Term Annuity

    Uploaded by

    zakibrant23
    38 views3 pages
    An annuity is a series of regular payments made into an account that earn compound interest. There are two types of annuities: ordinary annuities where payments are made at the end of each period, and annuity due where payments are made at the beginning of each period. Sinking funds are a type of annuity where the future value is a specific amount, often used to save for large expenses like education or a down payment. Formulas can be used to calculate the future value, payment amount, or present value of an annuity based on interest rate, number of periods, and payment or future values.

    Original Description:

    anuity

    Original Title

    annuity.doc

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    An annuity is a series of regular payments made into an account that earn compound interest. There are two types of annuities: ordinary annuities where payments are made at the end of each period, and annuity due where payments are made at the beginning of each period. Sinking funds are a type of annuity where the future value is a specific amount, often used to save for large expenses like education or a down payment. Formulas can be used to calculate the future value, payment amount, or present value of an annuity based on interest rate, number of periods, and payment or future values.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    38 views3 pages

    Example of A Short-Term Annuity

    Uploaded by

    zakibrant23
    An annuity is a series of regular payments made into an account that earn compound interest. There are two types of annuities: ordinary annuities where payments are made at the end of each period, and annuity due where payments are made at the beginning of each period. Sinking funds are a type of annuity where the future value is a specific amount, often used to save for large expenses like education or a down payment. Formulas can be used to calculate the future value, payment amount, or present value of an annuity based on interest rate, number of periods, and payment or future values.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 3

    Annuity: A sequence of equal regular payments into an account where each payment receives compound interest.

    Example of a Short-term annuity: Christmas club account. Using our previous formulas for FV, we would need to compute a new value with every new deposit. Example 1: Deposit $150 at the beginning of each month starting July 1st until Dec. 1st. Earning 9 % compounded monthly. How much will you have? FV of first deposit (July)= FV of second deposit (Aug) = FV of third deposit (Sept) = FV of fourth deposit (Oct) = FV of fifth deposit (Nov) = Take money out Dec. 1 = Payment period of an annuity is the time between payments (deposits). The Term of an annuity is the time from the beginning of the first payment to the end of last payment. Simple annuities have the same compounding period as payment period. This textbook only uses simple annuities. Annuity Due = payments at the beginning of each period Ordinary Annuity = Payments at the end of each period

    We computed the FV of each payment, then added all the FVs. Simplified Formulas: FV(Ordinary Annuity) = pymt [(1 + i)n 1] i FV(Annuity Due) = [FV(ordinary)] (1 + i) FV(Annuity Due) = pymt [(1 + i)n 1 ] (1 + i) i pymt = amount of each payment i= periodic rate = ( interest rate ) (# of periods a year)

    n = number of pymts = (# of periods a year)(# of years) Tax Deferred Annuities (TDA) are set up in order to save for retirement. It is automatically deducted from a persons paycheck until retirement. Federal and State tax deductions are computed after the annuity payment has been taken out

    Exercise 2: Long term simple annuity (ordinary) If I start at 42 years old to have $150 deducted from my paycheck every month and deposit it into an account that pays 12% whose term ends on my 62nd birthday. How much will I have? Find FV. i = .12/12 = .01 n = (12)(20) = 240 pymt = $150

    FV = 150 [(1 + .01)240 1] = $148,388.30 .01 How much of that is interest? Own contributions ($150)(240) = $36,000 FV contributions = interest earned

    $148,388.30 $36,000 = $112,388.30 interest! Sinking Funds: An annuity in which the FV is a specific amount. Usually set up for college education, down payments on house. Example 3: How much must be deducted from Mrs. Olsons paycheck if she wants to set up a sinking fund to pay for her babys college education, $30, 000 at the end of 18 years. Paychecks are cut bi-weekly in an account paying 8 %? Biweekly means every two weeks = 26 weeks/year i = .0875/26 = .003365385 n =(26)(18) = 468 FV = $30,000

    $30,000 = pymt [(1 + .003365385)468 1 ] = pymt(1134.4868) .003365385 $ 30,000 = pymt = $26.4436 = $26.44 1134.4868 Actually earned: FV = $26.44(1134.4868) = $29,995.83 because we rounded down $26.4436 Present Value of an annuity refers to the lump sum that must be deposited at the beginning of an annuitys term @ the same interest rate and compounding period that would yield the same amount as an annuity. Example 4: What is the present Value of the previous example; what lump sum must be deposited to earn $29,995.83 @ 8 % compounded bi-weekly for 18 years? Find P. FV = $29,995.83 I = .0875/26 = .003365385 n = (26)(18) = 468

    $29,996.83 = P(1 + .003365385)468 = P(4.817984483) $ 29,995.83 = P = $6225.80 4.817984483

    You might also like