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Understanding Types of Annuities

An annuity is a series of equal payments made at regular intervals. There are three main types: ordinary annuities make payments at the end of each period; annuities due make payments at the beginning of each period; and deferred annuities delay the first payment by some number of periods. Annuities can be used for installment purchases, loan amortization, depreciation, and insurance payments. Formulas are provided to calculate the present value (P) or future value (F) of an annuity when the payment amount (A) is given.

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9 views3 pages

Understanding Types of Annuities

An annuity is a series of equal payments made at regular intervals. There are three main types: ordinary annuities make payments at the end of each period; annuities due make payments at the beginning of each period; and deferred annuities delay the first payment by some number of periods. Annuities can be used for installment purchases, loan amortization, depreciation, and insurance payments. Formulas are provided to calculate the present value (P) or future value (F) of an annuity when the payment amount (A) is given.

Uploaded by

Marvin Bryant Medina
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

ANNUITY - a series of equal payments occurring at equal intervals of time.

Types of Annuity:
a. Ordinary annuity
b. Annuity due
c. Deferred annuity

Application of Annuity

Installment purchase

Amortization of loan

Depreciation

Payment of insurance

Amortization - is any method of repaying a debt, the principal and interest included, usually by a series
of equal payments at equal interval of time.

Ordinary Annuity
An ordinary annuity is one where the payments are made at the end of each period.
Finding P when A is given
P

n-1

Finding F when A is given


F

n-1

A
A(F/P, i%, 1)

A(F/P, i%, n-3)


A(F/P, i%, n-2)
A(F/P, i%, n-1)

Annuity Due
An annuity due is one where the payments are made at the beginning of each period.
Finding P when A is given
P

n-1

P = A + A [(1 + i) n-1 1 / i (1 + i) n-1]

Finding F when A is given


F = P(1 + i)n-1

Deferred Annuity
A deferred annuity is one where the first payment is made several periods after the beginning of the
annuity.
Finding P when A is given
P
m periods

n periods

A(P/A, i%, n)(P/F, i%, m)

m
0

n-1

A(P/A, i%, n)

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