Annuities Student Handout

Annuities Annuity (Definition) An annuity is series of regular payments (or withdrawals) of the same amount each time. Two basic types of annuity problems: 1. 2.

Calculating Annuities using a timeline Ex #1 – Find the future value of $500 deposited at the end of each year for 4 years at an annual interest rate of 8% compounded annually. A= R = i = n = Now 1 2 3 4 500 500 500 500 Therefore, the annuity will be worth $

Using the Formula  

Calculating Annuities using technology Ex #1 – Find the future value of $500 deposited at the end of each year for 4 years at an annual interest rate of 8% compounded annually. http://www.fncalculator.com/financialcalculator?type=tvmCalculator Payment = Annual Rate% = Periods = Compounding = Then click on FV Futute Value is $

Calculating Annuities using technology Ex #2 – Find the present value of a series of regular $500 withdrawals from an investment account earning 8%/a compounded monthly. Assume you are withdrawing $500 per year for 4 years at the end of the year. http://www.fncalculator.com/financialcalculator?type=tvmCalculator Payment = Annual Rate% = Periods = Compounding = Then click on PV Present Value is $

Using a Timeline Ex #2 – Find the present value of a series of regular $500 withdrawals from an investment account earning 8%/a compounded monthly. Assume you are withdrawing $500 per year for 4 years at the end of the year.

Using the Graphing Calculator App N – total number of payments I% - annual interest rate (as a percent) PV – present value PMT – payment amount FV – future value P/Y – payments per year C/Y – compounding periods per year PMT : BEGIN – indicates if the payment is at the end or the beginning of the payment cycle Entered as negative if money is paid out END Steps to solve: 1. Enter all the information you are given, leaving the unknown value blank. 2. Scroll back to the unknown value, highlight it and hit Alpha Enter

Technology Examples Ex #1 – Calculate your car payments if you have borrowed $10,000 for 4 years, with an interest rate of 4.8%/a compounded monthly and your payments are monthly at the end of the month.

Technology Examples Ex #2 – You want to retire with $650000. Find the amount you must deposit monthly for 35 years if your retirement investment fund (RIF) earns 6.4%/a compounded monthly. Assume you are depositing your money at the end of the month.

Homework / Practice Solve the following problems using a timeline. Find the future value of $400 deposited at the beginning of each year for 4 years at an annual interest rate of 12% compounded monthly. Find the present value of a series of regular $1000 withdrawals from an investment account earning 5%/a compounded monthly. Assume you are withdrawing $1000 per year for 4 years at the end of the year. Answers: 1. $2175.82 2. $3536.40 Practice using formulas with textbook questions.