7. Annuities and loan repayments Cambridge University Press  G K Powers 2013 Study guide Chapter 7

Future value of an annuity Future value of an annuity is the sum of money contributed plus the compound interest earned. To use a prepared table: Determine the time period and rate of interest. Find the intersection of the time period and rate of interest in the table. Multiply the number in the intersection with the money contributed. HSC Hint – Match the time period and the rate of interest: annually, biannually, quarterly or monthly. Cambridge University Press  G K Powers 2013

Table of future values Future value of $1 End of year 5% 6% 7% 8% 1 1.0000 2 2.0500 2.0600 2.0700 2.0800 3 3.1525 3.1836 3.2149 3.2464 4 4.3101 4.3746 4.4399 4.5061 Cambridge University Press  G K Powers 2013

Present value of an annuity Present value of an annuity is the amount of money that, if invested now, would equal the future value of the annuity. To use a prepared table: Determine the time period and rate of interest. Find the intersection of the time period and rate of interest in the table. Multiply the number in the intersection with the money contributed. HSC Hint – The compound interest formula relates future value and present value. Cambridge University Press  G K Powers 2013

Table of present values Present value of $1 End of year 3% 4% 5% 6% 6 5.4172 5.2421 5.0757 4.9173 7 6.2303 6.0021 5.7864 5.5824 8 7.0197 6.7327 6.4632 6.2098 9 7.7861 7.4353 7.1078 6.8017 Cambridge University Press  G K Powers 2013

Loan repayments Reducing balance loans are calculated on the balance owing, not on the initial amount of money borrowed. As payments are made, the balance owing is reduced and therefore the interest charged is reduced. HSC Hint – Check that the reducible interest being charged for a loan is steadily decreasing. Cambridge University Press  G K Powers 2013