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Time Value of Money Part 3

An annuity is a series of periodic, equal payments made at regular intervals. There are two types: ordinary annuities where payments are made at the end of each period, and annuities due where payments are made at the beginning of each period. The future and present value of annuities can be calculated using formulas that take into account the interest rate and number of payment periods. Worked examples are provided to demonstrate calculating future and present values of annuities.

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Madeeha Khan
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15 views7 pages

Time Value of Money Part 3

An annuity is a series of periodic, equal payments made at regular intervals. There are two types: ordinary annuities where payments are made at the end of each period, and annuities due where payments are made at the beginning of each period. The future and present value of annuities can be calculated using formulas that take into account the interest rate and number of payment periods. Worked examples are provided to demonstrate calculating future and present values of annuities.

Uploaded by

Madeeha Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TIME VALUE OF

MONEY PART 3 By Dr. Muhammad Ali

(ANNUITY)
WHAT IS ANNUITY?
Annuity is define as a series of periodic payments.
For example:
1. Regular deposit to a savings account.
2. Monthly payment for car, house loan.
3. Insurance payment.
ORDINARY ANNUITY VS
ANNUITY DUE
An ordinary annuity is a series of equal payments and the
payments occur at the end of each period.
For example: We earn interest on savings account at the end of
each tenure.
An annuity due is a series of equal payments and the payments
occur at the beginning of each period.
For example: We pay rent to the landlord at the start of each month.
ASSUMPTIONS
Annuity involves a series of equal payments.
Payment will be made at the end of each compounding period.
The units for “I” and “n” must be consistent.
ANNUITIES AND THEIR
FUTURE VALUE
In this section, we will discuss the future of annuity.
Mathematically,
S = R [ (1+i)^n -1/ i ]
Where,
S = Sum or future value of annuity
R = Amount of annuity
I = interest rate
N = no. of compounding periods
Note: We can use Future Value Annuity factor table
ANNUITIES AND THEIR
PRESENT VALUE
It is define as the amount of money today which is equivalent to a series of equal
payments in future time.
For example: You have won a lottery and the owners have given you a choice to receive a
series of equal payments at the end of each year in next 5 years.
Mathematically,
A = R [ (1 +i)^n – 1/ i(1+i)^n ]
Where,
A = Present value of annuity
R = Amount of annuity
I = interest rate
N = no. of compounding periods
Note: We can use Present Value Annuity factor table
LET’S DO EXAMPLES!

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