ANNUITIES




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Finance Notes Annuities Page 1 of 8 ANNUITIES Objectives After completing this section you should be able to do the following Calculate the future value of an ordinary annuity Calculate the amount of interest earned in an ordinary annuity Calculate the total contributions to an ordinary annuity Calculate monthly payments that will produce a given future value Vocabulary As you read you should be looking for the following vocabulary words and their definitions ordinary annuity simple annuity Christmas club tax deferred annuity TDA present value of an annuity Formulas You should be looking for the following formulas as you read future value of an ordinary annuity total contribution to an annuity interest earned on an annuity present value of an annuity An annuity is defined by merriam webster com as a sum of money payable yearly or at other regular intervals Wikipedia defines an annuity as any recurring periodic series of payment Some examples of annuities are regular payments into a savings account monthly mortgage payments regular insurance payments etc Annuities can be classified by when the payments are made Annuities whose payments are made at the end of the period are called ordinary annuities Annuities whose payments are made at the beginning of the period are called annuity due In this class we will only work with ordinary annuities ordinary annuity annuity due Finance Notes Annuities Page 2 of 8 We will need to be able to calculate the future value of our annuities In order to do this we will need a formula to calculate future value if we know the amount of the payment the interest rate and compounding period and the number of payments Future Value of an Ordinary Annuity n t 1 r 1 n FV pymt r n FV future value pymt payment amount r interest rate in decimal form n number of compounding periods in one year t time in years NOTE The payment period and the compounding period will always match in our problems Annuities which have the same payment and simple annuity






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