4 AnnuitiesAnnuity: an interest-bearing account where we make a series of regular deposits of the same amountOrdinary Annuity: depositing the same amount at the end of every compounding periodObserve that the problem of calculating the value of an annuity is different from Section 9.2:In Section 9.2, we deposited ONE lump sum into an account and compounded interestIn this section, we are depositing the same amount into the account at regular intervalsEarlier deposits will gain more interest than later ones
5 Annuities (Continued) We will be dealing only with ordinary annuitiesThe amount A that is present in the annuity at time t (in years) where R is the amount of deposit, n is the number of compounding periods per year, and r is the annual interest rate of the account isFor theory refer to pages of the textbookEssential idea is that earlier deposits accumulate more interest than later depositsDo not be intimidated by the formula – perform the calculations in steps instead of all at onceSee page 425 in the textbook
6 Annuities (Example)Ex 1: Calculate the value of the annuity: a) Amount to deposit, $200; compounded monthly; annual rate of 3%; over 8 years b) Amount to deposit, $500; compounded monthly; annual rate of 7.5%; over 12 years
7 Annuities (Example)Ex 2: Matt is saving to buy a new Vespa scooter. If he deposits $75 at the end of each month into an account that pays an annual interest rate of 6.5%, how much will he have saved in 2.5 years?
9 Sinking FundsSink Fund: an account where deposits are made regularly to meet a financial goalAgain, different from Section 9.2Idea is to save up the entire purchase price so we will not go into debtAnother type of annuity so no need to learn a new formulaInstead of answering the question “how much will I have,” a sink fund answers the question “how much do I need to put in regularly?”Naturally, we can estimate the regular amount to deposit, but this ignores the accruing interest
10 Sinking Funds (Example) Ex 3: Kanye wants to save $14,000 in 8 years by making monthly payments into an ordinary sink fund for a down payment on a condominium. If the fund pays 8.4% interest annually, what will his regular monthly payment be to meet his goal?
11 Sinking Funds (Example) Ex 4: Sandra Lee is making monthly payments into a sink fund. She wants to have $600 in the fund in 6 months in order to buy an oven for her delicious baked goods. If the account pays an annual interest rate of 8.2%, what regular monthly payment would allow her to meet her goal?
12 SummaryAfter studying these slides, you should know how to do the following:Calculate the amount in an annuityCalculate required payments in a sink fund to meet financial goalsAdditional Practice:See problems for Section 9.4Next Lesson:Amortization (Section 9.5)