Deferred Annuities Certain

General terminology

• A deferred annuity is an annuity whose first payment takes place at

some predetermined time k + 1
• k|n a. . . the present value of a basic deferred annuity-immediate with
term equal to n and the deferral period k; it can be readily expressed
as

k|n a = v k · an = ak+n − ak

• It makes sense to ask for the value of a deferred annuity at any time
before the beginning of payments and also after the term of the
annuity is completed; here we mean more than one period before
and more than one period after since these two cases are easily
reduced to annuities immediate and annuities due
• It will be clear what we mean after some examples . . .
 General terminology

• A deferred annuity is an annuity whose first payment takes place at

some predetermined time k + 1
• k|n a. . . the present value of a basic deferred annuity-immediate with
term equal to n and the deferral period k; it can be readily expressed
as

k|n a = v k · an = ak+n − ak

• It makes sense to ask for the value of a deferred annuity at any time
before the beginning of payments and also after the term of the
annuity is completed; here we mean more than one period before
and more than one period after since these two cases are easily
reduced to annuities immediate and annuities due
• It will be clear what we mean after some examples . . .
 General terminology

• A deferred annuity is an annuity whose first payment takes place at

some predetermined time k + 1
• k|n a. . . the present value of a basic deferred annuity-immediate with
term equal to n and the deferral period k; it can be readily expressed
as

k|n a = v k · an = ak+n − ak

• It makes sense to ask for the value of a deferred annuity at any time
before the beginning of payments and also after the term of the
annuity is completed; here we mean more than one period before
and more than one period after since these two cases are easily
reduced to annuities immediate and annuities due
• It will be clear what we mean after some examples . . .
 General terminology

• A deferred annuity is an annuity whose first payment takes place at

some predetermined time k + 1
• k|n a. . . the present value of a basic deferred annuity-immediate with
term equal to n and the deferral period k; it can be readily expressed
as

k|n a = v k · an = ak+n − ak

• It makes sense to ask for the value of a deferred annuity at any time
before the beginning of payments and also after the term of the
annuity is completed; here we mean more than one period before
and more than one period after since these two cases are easily
reduced to annuities immediate and annuities due
• It will be clear what we mean after some examples . . .
 An Example: Accumulated value after the
last payment date

• On January 1st of year y , you open an investment account. If an

annuity such that twelve annual payments equal to $2, 000 are made
starting December 31st of year y is going to be credited to the
account, find the account balance on December 31st four years after
the last annuity payment. Assume that i = 0.05.
 An Example: Accumulated value after the
last payment date (cont’d)
⇒ The payments are level, so let us start by considering a basic
deferred annuity-immediate.
The accumulated value of the 12−year long annuity-immediate at
the time of the last payment is

s12 0.05

During the following four years this value will grow to

(1 + 0.05)4 · s12 0.05

Finally, recall that each level payment equals $2,000. So, the
accumulated value we seek is
(1 + 0.05)12 − 1
2000 · (1 + 0.05)4 · s12 0.05 = 2000 · (1 + 0.05)4 ·
0.05
= 38, 694.73.
• Assignment: For a similar story, see Example 3.5.2
 An Example: Accumulated value after the
last payment date (cont’d)
⇒ The payments are level, so let us start by considering a basic
deferred annuity-immediate.
The accumulated value of the 12−year long annuity-immediate at
the time of the last payment is

s12 0.05

During the following four years this value will grow to

(1 + 0.05)4 · s12 0.05

Finally, recall that each level payment equals $2,000. So, the
accumulated value we seek is
(1 + 0.05)12 − 1
2000 · (1 + 0.05)4 · s12 0.05 = 2000 · (1 + 0.05)4 ·
0.05
= 38, 694.73.
• Assignment: For a similar story, see Example 3.5.2
 An Example: Accumulated value after the
last payment date (cont’d)
⇒ The payments are level, so let us start by considering a basic
deferred annuity-immediate.
The accumulated value of the 12−year long annuity-immediate at
the time of the last payment is

s12 0.05

During the following four years this value will grow to

(1 + 0.05)4 · s12 0.05

Finally, recall that each level payment equals $2,000. So, the
accumulated value we seek is
(1 + 0.05)12 − 1
2000 · (1 + 0.05)4 · s12 0.05 = 2000 · (1 + 0.05)4 ·
0.05
= 38, 694.73.
• Assignment: For a similar story, see Example 3.5.2
 An Example: Accumulated value after the
last payment date (cont’d)
⇒ The payments are level, so let us start by considering a basic
deferred annuity-immediate.
The accumulated value of the 12−year long annuity-immediate at
the time of the last payment is

s12 0.05

During the following four years this value will grow to

(1 + 0.05)4 · s12 0.05

Finally, recall that each level payment equals $2,000. So, the
accumulated value we seek is
(1 + 0.05)12 − 1
2000 · (1 + 0.05)4 · s12 0.05 = 2000 · (1 + 0.05)4 ·
0.05
= 38, 694.73.
• Assignment: For a similar story, see Example 3.5.2
 An Example: Accumulated value after the
last payment date (cont’d)
⇒ The payments are level, so let us start by considering a basic
deferred annuity-immediate.
The accumulated value of the 12−year long annuity-immediate at
the time of the last payment is

s12 0.05

During the following four years this value will grow to

(1 + 0.05)4 · s12 0.05

Finally, recall that each level payment equals $2,000. So, the
accumulated value we seek is
(1 + 0.05)12 − 1
2000 · (1 + 0.05)4 · s12 0.05 = 2000 · (1 + 0.05)4 ·
0.05
= 38, 694.73.
• Assignment: For a similar story, see Example 3.5.2
 An Example:
Present value of a deferred annuity -
The value before the term of the annuity

• Today is January 1st of year y . An annuity-immediate pays $1,000 at

the end of every quarter. The first payment is scheduled for March
31st of year y + 1 and the last payment for December 31st of year
y + 5. Assume that the rate of interest is equal to i (4) = 0.08. Find
the present value of the annuity.
 An Example:
Present value of a deferred annuity -
The value before the term of the annuity
(cont’d)
⇒ It is more convenient to be thinking in terms of quarter-years. The
interest rate per quarter is j = i (4) /4 = 0.02.
The value on January 1st of year y + 1 of a basic
annuity-immediate corresponding to the one in the example is
1 − v 24
a24 0.02 = = 18.913.93
i
So, the present value of a basic annuity-immediate is
 4
1
a24 0.02 = 17.4735
1.02
Finally, the present value of our level annuity-immediate is
 4
1
1000 · · a24 0.02 = 17, 473.5
1.02
 An Example:
Present value of a deferred annuity -
The value before the term of the annuity
(cont’d)
⇒ It is more convenient to be thinking in terms of quarter-years. The
interest rate per quarter is j = i (4) /4 = 0.02.
The value on January 1st of year y + 1 of a basic
annuity-immediate corresponding to the one in the example is
1 − v 24
a24 0.02 = = 18.913.93
i
So, the present value of a basic annuity-immediate is
 4
1
a24 0.02 = 17.4735
1.02
Finally, the present value of our level annuity-immediate is
 4
1
1000 · · a24 0.02 = 17, 473.5
1.02
 An Example:
Present value of a deferred annuity -
The value before the term of the annuity
(cont’d)
⇒ It is more convenient to be thinking in terms of quarter-years. The
interest rate per quarter is j = i (4) /4 = 0.02.
The value on January 1st of year y + 1 of a basic
annuity-immediate corresponding to the one in the example is
1 − v 24
a24 0.02 = = 18.913.93
i
So, the present value of a basic annuity-immediate is
 4
1
a24 0.02 = 17.4735
1.02
Finally, the present value of our level annuity-immediate is
 4
1
1000 · · a24 0.02 = 17, 473.5
1.02
 An Example:
Present value of a deferred annuity -
The value before the term of the annuity
(cont’d)
⇒ It is more convenient to be thinking in terms of quarter-years. The
interest rate per quarter is j = i (4) /4 = 0.02.
The value on January 1st of year y + 1 of a basic
annuity-immediate corresponding to the one in the example is
1 − v 24
a24 0.02 = = 18.913.93
i
So, the present value of a basic annuity-immediate is
 4
1
a24 0.02 = 17.4735
1.02
Finally, the present value of our level annuity-immediate is
 4
1
1000 · · a24 0.02 = 17, 473.5
1.02
 Assignment

• Examples 3.5.3,4
• Problems 3.5.1,2
 Assignment

• Examples 3.5.3,4
• Problems 3.5.1,2