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Deferred Annuity

A deferred annuity is an annuity where payments do not begin until a specified period of time has passed. This period of time between purchasing the annuity and payments beginning is called the period of deferral. To determine the present value of a deferred annuity, the present value of all payments, including "artificial payments" during the deferral period, is calculated and then the present value of the artificial payments is subtracted. The formula for the present value takes into account the regular payment amount, interest rate, number of payments, and number of conversion periods in the deferral period.

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1K views8 pages

Deferred Annuity

A deferred annuity is an annuity where payments do not begin until a specified period of time has passed. This period of time between purchasing the annuity and payments beginning is called the period of deferral. To determine the present value of a deferred annuity, the present value of all payments, including "artificial payments" during the deferral period, is calculated and then the present value of the artificial payments is subtracted. The formula for the present value takes into account the regular payment amount, interest rate, number of payments, and number of conversion periods in the deferral period.

Uploaded by

Euphemia Raine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DEFERRED

ANNUITY
DEFINITION OF TERMS:
DEFERRED ANNUITY – AN ANNUITY THAT
DOES NOT BEGIN UNTIL A GIVEN TIME
INTERVAL HAS PASSED.
PERIOD OF DEFERRAL – TIME BETWEEN THE
PURCHASE OF AN ANNUITY AND THE START
OF THE PAYMENTS FOR THE DEFERRED
ANNUITY.
TIME DIAGRAM FOR DEFERRED ANNUITY
R* R* ... R* R R … R
0 1 2 … k k+1 k+2 k+n

THE PERIOD OF DEFERRAL IS k


BECAUSE THE REGULAR PAYMENTS OF R
START AT TIME k+1.
TIME DIAGRAM FOR DEFERRED ANNUITY
R* R* ... R* R R … R
0 1 2 … k k+1 k+2 k+n

THE NOTATION R* REPRESENT k


“ARTIFICIAL PAYMENTS,” EACH EQUAL TO R,
BUT ARE NOT ACTUALLY PAID DURING THE
PERIOD OF DEFERRAL.
TO DETERMINE THE PRESENT
VALUE OF A DEFERRED ANNUITY,
FIND THE PRESENT VALUE OF ALL
k+n PAYMENTS (INCLUDING THE
ARTIFICIAL PAYMENTS), THEN
SUBTRACT THE PRESENT VALUE OF
ALL ARTIFICIAL PAYMENTS.
PRESENT VALUE OF A DEFERRED ANNUITY
THE PRESENT VALUE OF A DEFERRED ANNUITY IS
GIVEN BY
−(𝑘+𝑛)
1− 1+𝑗 1 − (1 + 𝑗)−𝑘
𝑃=𝑅 −𝑅
𝑗 𝑗

where:
R - REGULAR PAYMENT
j - INTEREST RATE PER PERIOD
n – NUMBER OF PAYMENTS
k – NUMBER OF CONVERSION PERIODS IN THE DEFERRAL
EXAMPLE 1:
ON HIS 40TH BIRTHDAY, MR. RAMOS DECIDED TO BUY A
PENSION PLAN FOR HIMSELF. THIS PLAN WILL ALLOW
HIM TO CLAIM P10,000 QUARTERLY FOR 5 YEARS
STARTING 3 MONTHS AFTER HIS 6OTH BIRTHDAY. WHAT
ONE-TIME PAYMENT SHOULD HE MAKE ON HIS 40TH
BIRTHDAY TO PAY OFF THIS PENSION PLAN, IF THE
INTEREST RATE IS 8% COMPOUNDED QUARTERLY?
GIVEN: R = 10,000
m=4
𝑖 4 = 0.08
FIND: P
SOLUTION:
k = mt = (4)(20) = 80

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