ANNUITY NA

DEFFERED ANNUITY
ORDINARY ANNUITY
 Example 1: Alan was getting $100 for 5 years every year at an interest rate of 5%. Find
the future value using the ordinary annuity formula at the end of 5 years?
Solution:
The future value
Given: r = 0.05, 5 years = 5 yearly payments, so n = 5, and P = $100
FV = P×((1+r)n−1) / r
FV = $100 × ((1+0.05)5−1) / 0.06
FV = 100 × 55.256
FV = $552.56
Answer: The longer-term value of annuity after the end of 5 years is $552.56.
 Example 2: If the present value of the annuity is $20,000. Assuming a monthly interest
rate of 0.5%, find the value of each payment after every month for 10 years.
Solution
To find: The value of each payment
Given:
r = 0.5% = 0.005
n = 10 years x 12 months = 120, and PV = $20,000
Using formula for present value
PV = P×(1−(1+r)-n) / r
Or, P = PV × ( r / (1−(1+r)−n))
P = $20,000 × (0.005 / (1−(1.005)−120))
P = $20,000 × (0.005/ (1−0.54963))
P = $20,000 × 0.011...
P = $220
Answer: The value of each payment is $220.
Example 3
A Bond will pay 5 million Dollars after 5 Years. Each Year it will pay 5% interest on Face Value.
The rate prevailing in the market is 4%. What should be the price of the Bond now?
Solution:
 Payment made by bond each year – 5% on 5 million = 250000
 Discount Rate = 4%
 Number of Years = 5
 Face Value received at the end of 10 Years = 5,000,000
Price of the Bond today = Present Value of Ordinary Annuity
 = 250,000/(1 +0.04)1 + 250000/(1 +0.04)2 + 250,000/(1 +0.04)3 + 250,000/(1
+0.04)4 + 5,250,000/(1+0.04)5
 = $5,222,591.117
Example 4
Mr. X wants to make a corpus of $5 million after five years with the Interest rate prevailing in
the market at @5%. Mr. X wants to make yearly payments.
Solution:
Future Value of Ordinary Annuity = Annuity Payment (1 + Periodic Interest Rate)Number Of
Periods * Number of years
5,000,000 = Annuity Payment ( 1 + 0.05)n + Annuity Payment ( 1 + 0.05)n-1 + …… Annuity
Payment ( 1 + 0.05)n-4
Annuity Payment = $904,873.99
Example 5
1. The present value of an annuity for ten years is 10,000. Find the size of the quarterly
= 10 years n = 10 × 4 = 40 periods i = 0.08 ÷ 4 = 0.02 Solution: 𝑃𝑚𝑡 = 𝑃𝑉1 − (1 + 𝑖)−𝑛𝑖

payment if the interest rate is 8% compounded quarterly. Given: PV = 10,000 r = 8% or .08 t
= 𝐏𝟑𝟔𝟓.𝟓𝟔
= 10,0001 − (1 + 0.02)−400.02 = 10,0000.547109584814763659049014919720020.02
=10,00027.355479240738182952450745986001
ANNUITY DUE
Example #1
Stephan has deposited $1,000 at the start of the year
and plans to invest the same every year until five years.
The interest rate earned will be 5%. You are required to
do the calculation of the future value of an annuity due.
Solution:
Here we are being asked to do the calculation of the future

value of an annuity due using the below information
 Periodic Payment (P): 1000

 Number of period (n): 5
 Rate of Interest (r): 5.00%
For calculation of the future value of an annuity, we can use the

above formula:
Future Value of Annuity Due = (1+5.00%) x 1000 [{(1+5.00%)5

– 1}/5.00%]
Future value of an annuity due will be –

Future value of an annuity=$ 5,801.91
Example #2
Mr. William wants to purchase a house after a couple of
years. His target house value is $3,000,000. He decides
to invest in a product where he can deposit yearly
$600,000 starting at the beginning of each year until
year 10. He wants to know what is the present value of
the annuity investment that he is doing. This would
enable him to know what the true cost of the property in
today’s term is. You are required to do the calculation of
the present value of the annuity due that Mr. William is
planning to make. Assume that the rate earned on
investment will be 12%.
Solution:
Here, Mr. William is making an annual investment of $60,000 to

achieve the goal of purchasing the property, which values
around $3,000,000.
 Periodic Payment (P): $600,000

 Rate of Interest (r): 12%
 Frequency of Interest: 1
We are given the principal amount, the frequency of investing,
and the rate of interest, and therefore we can use the below
formula to calculate the same.
Present Value of Annuity Due = 60,000 + 60,000 [{1-(1+0.12)-

(10-1)}/12%]
It appears that by investing $600,000 yearly in the product, Mr.

William would be easily able to purchase the house, which is
what he is planning for.
Example #3
Company X is a highly capital-intensive invested company. It
imports most of the machinery from foreign countries as it is
cheaper than buying from the local market. The company plans
to set aside an amount of $118,909 semi-annually starting now.
As per the recent market trends, the average revenue earned
on the investment is 8%. The company expects to fund the
machinery after 15 years, where they expect the value of the
machinery to be $7,890,112. The company wants to know what
the future value of the investment shall be, and will they be
able to fund it, or they would require funds in the form of a
loan.
You are required to calculate the future value of the annuity

investment done by the company and compute the amount of
loan if the company requires it?
Solution:
In this example, the company is trying to keep aside funds for

replacing the machinery and avoid any Ad Hoc fund
requirement in the form of costly borrowing.
 Investment amount per period (P): $118,909

 Rate of Interest (r): 8%
 Frequency of Interest: 2
The frequency here is semi-annually. The payment every period

gave is $118,909, and the period will be 15*2, which is 30
years. The rate of interest will be 8/2, which is 4%
Future Value of Annuity Due = (1+0.04) x 118,909
[{(1+0.04)30-1}/0.04
The value of the machinery is $7,890,112, and the return from

the investment amount is $6,935,764.02, and therefore, the
company will be required to borrow a loan, which shall be a
difference of these which is equal to $954,347.98.
Example 4
Example 5

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DEFFERED ANNUITY

= 10 years n = 10 × 4 = 40 periods i = 0.08 ÷ 4 = 0.02 Solution: 𝑃𝑚𝑡 = 𝑃𝑉1 − (1 + 𝑖)−𝑛𝑖

Here we are being asked to do the calculation of the future

 Periodic Payment (P): 1000

For calculation of the future value of an annuity, we can use the

Future Value of Annuity Due = (1+5.00%) x 1000 [{(1+5.00%)5

Future value of an annuity due will be –

Here, Mr. William is making an annual investment of $60,000 to

 Periodic Payment (P): $600,000

Present Value of Annuity Due = 60,000 + 60,000 [{1-(1+0.12)-

It appears that by investing $600,000 yearly in the product, Mr.

You are required to calculate the future value of the annuity

In this example, the company is trying to keep aside funds for

 Investment amount per period (P): $118,909

The frequency here is semi-annually. The payment every period

The value of the machinery is $7,890,112, and the return from

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