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    Math 2FM3, Fall 2016, Lecture 10: 2.2.3 Continuous Annuities (Continued)

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    Lucas Krenn
    This document summarizes key concepts about continuous annuities from a university lecture: 1) It provides an example of calculating the accumulated value of daily deposits over three years with different interest rates, using both exact daily calculations and a continuous deposit approximation. 2) Formulas are shown for calculating the accumulated value of a continuous annuity with n payments of amount J at an interest rate i, and for solving for any of the four variables (M, J, i, n) given three of them. 3) Similar formulas are presented for calculating the present value of a continuous annuity, and solving for the payment amount K, interest rate i, or number of periods n.

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    Math 2FM3, Fall 2016, Lecture 10: 2.2.3 Continuous Annuities (Continued)

    Uploaded by

    Lucas Krenn
    184 views5 pages
    This document summarizes key concepts about continuous annuities from a university lecture: 1) It provides an example of calculating the accumulated value of daily deposits over three years with different interest rates, using both exact daily calculations and a continuous deposit approximation. 2) Formulas are shown for calculating the accumulated value of a continuous annuity with n payments of amount J at an interest rate i, and for solving for any of the four variables (M, J, i, n) given three of them. 3) Similar formulas are presented for calculating the present value of a continuous annuity, and solving for the payment amount K, interest rate i, or number of periods n.

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    McMaster Math 3FM3 Fall 2016 lecture 10 financial mathematics

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    Math 2FM3 Mcmaster lecture 10

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    This document summarizes key concepts about continuous annuities from a university lecture: 1) It provides an example of calculating the accumulated value of daily deposits over three years with different interest rates, using both exact daily calculations and a continuous deposit approximation. 2) Formulas are shown for calculating the accumulated value of a continuous annuity with n payments of amount J at an interest rate i, and for solving for any of the four variables (M, J, i, n) given three of them. 3) Similar formulas are presented for calculating the present value of a continuous annuity, and solving for the payment amount K, interest rate i, or number of periods n.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    184 views5 pages

    Math 2FM3, Fall 2016, Lecture 10: 2.2.3 Continuous Annuities (Continued)

    Uploaded by

    Lucas Krenn
    This document summarizes key concepts about continuous annuities from a university lecture: 1) It provides an example of calculating the accumulated value of daily deposits over three years with different interest rates, using both exact daily calculations and a continuous deposit approximation. 2) Formulas are shown for calculating the accumulated value of a continuous annuity with n payments of amount J at an interest rate i, and for solving for any of the four variables (M, J, i, n) given three of them. 3) Similar formulas are presented for calculating the present value of a continuous annuity, and solving for the payment amount K, interest rate i, or number of periods n.

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    Lecture 10 0

    Math 2FM3, Fall 2016, Lecture 10

    2.2.3 Continuous Annuities (Continued)

    Example: In 2004 and 2005 you deposit 12 every day and in 2006
    you deposit 15 every day. The effective annual interest is 9% in 2004
    and 2005 and 12% in 2006 with daily compounding. Find the
    amount in account at the end of 2006 if:
    (a) exactly based on daily deposits.
    (b) using continuous deposits as an approximation.
    Let j1 be the equivalent daily rate in 2004 and 2005 and j2 be the
    equivalent daily rate in 2006. Then (1 + j1 )365 = 1.09 whence
    j1 = 0.0002 and (1 + j2 )365 = 1.12 whence j2 = 0.0003. So the

    McMaster University
    Lecture 10 1

    deposit is

    12s730ej1 (1.12) + 15s365ej2 = 16, 502.59.

    (b) with continuous deposits, the total per year in 2004 2005 is
    12 365 = 4380 and in 2006 is 15 365 = 5475. The accumulate
    value is

    4380s2e0.09 (1.12) + 5475s1e0.12 = 16, 504.75

    The present value at the time payment begins of a continuous


    annuity paying at rate 1 per period is
    Z n
    u 1 n 1 n
    anei = du = = .
    0 ln (1 + i)

    McMaster University
    Lecture 10 2


    2.2.4, 2.2.5 Equations of Annuities

    Let M be the accumulated value of an annuity with n payments of


    amount J each with an interest rate i per payment period:

    n1 (1 + i)n 1
    M = J[1 + (1 + i) + + (1 + i) ]=J = Jsnei ,
    i
    This can be regarded as an equation with 4 unknowns M, J, i, n.
    Whenever we are given 3 variables, we can solve for the forth.
    How much money J we have to put down each of n periods that an
    annuity with interest i accumulates to M ? Solve for J to get
    J = sMnei
    .

    How high must interest i be that an annuity with n level payments

    McMaster University
    Lecture 10 3

    of J accumulates to M ? Let x solve the polynomial

    n M M
    x x+ 1 = 0,
    J J
    then i = x 1.
    In how many periods n of level payments J does an annuity
    accumulate to M ? Solve for n :
    Mi
    
    ln J + 1
    n= .
    ln (1 + i)

    The same holds for the present value. The present value of an
    annuity with n payments of amount K is L defined by

    n
    1
    L = K[ + 2 + + n ] = K = Kanei .
    i

    McMaster University
    Lecture 10 4

    Solve for K:
    Li L
    K= n
    =
    1 anei
    Present-value factor solves the polynomial
    L L
    vn + 1 = 0.
    K K
    Solve for n to get

    Li
    
    ln 1 K
    n=
    ln

    McMaster University

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