Concept of annuity
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An annuity is a financial product that pays out fixed, regular payments to an individual for income. There are two types of annuities: annuity immediate and annuity due. An annuity immediate makes payments at the end of each payment period, while an annuity due makes payments at the beginning of each period. The present and future value formulas for annuity immediate differ slightly from those of annuity due by a factor of 1+i, the interest rate.
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Concept of annuity
- 1. Concept of Annuity Annuity Immediate Vs. Annuity Due By: Rohan Byanjankar
- 2. Annuity • An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. • Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time.
- 3. • 𝐹𝑉𝐴 = 𝑃𝑀𝑇 × 1+𝑖 𝑛−1 𝑖 • 𝑃𝑉𝐴 = 𝑃𝑀𝑇 × 1− 1 1+𝑖 𝑛 𝑖 Annuity Immediate
- 5. • 𝐹𝑉𝐴 = 𝑃𝑀𝑇 × 1+𝑖 𝑛−1 𝑖 × (1 + 𝑖) • 𝑃𝑉𝐴 = 𝑃𝑀𝑇 × 1− 1 1+𝑖 𝑛 𝑖 × (1 + 𝑖) Annuity Due
- 6. Annuity Due
- 7. Annuity Immediate AT A GLANCE • FVA = PMT × 1+i n−1 i or PMT × FVIFA(i%, n) • PVA = PMT × 1− 1 1+i n i or PMT × PVIFA(i%, n) Note: If interest (i) or time (n) is in decimal, then it is better not to use tabular formula.
- 8. Annuity Due AT A GLANCE • FVA = PMT × 1+i n−1 i × (1 + i) or PMT × FVIFA(i%, n) × (1 + i) • PVA = PMT × 1− 1 1+i n i × (1 + i) or PMT × PVIFA(i%, n) × (1 + i) Note: If interest (i) or time (n) is in decimal, then it is better not to use tabular formula.