Savings Annuities

An annuity is where you make a series of periodic payments into an account. The typical types of accounts are superannuation and loans. There are basically two types of annuities. – Future Value – Present Value

Future Value This is when the lump sum of money will exist in the FUTURE. You need to read the question and decide on when the lump sum will exist. Then you need to write down the variables. Which ever one you are missing – is the one you have to find.

Finding FV

N = I% = PV = Pmt = FV = P/Y = C/Y = 15 x ? 1 Solution : $

Note that PMT is negative

Future Value - n You need to read the question to make sure that the LUMP SUM will exist in the FUTURE and there are a series of deposits. Write down the variables – check P/Y and C/Y Enter the data in and solve for n – F1 The answer you get will be in terms of the number of periods – i.e. number of months.

There are a regular series of payments – so it has to be an annuity question. The money will exist in the FUTURE – so it has to be a future value question. We have the FV the PMT, the Rate (I%) – we haven’t got n.

N = I% = PV = Pmt = FV = P/Y = C/Y = ? Solution : 34.39

34.39 months

Future Value – I% You need to read the question to make sure that the LUMP SUM will exist in the FUTURE and there are a series of deposits. Write down the variables – check P/Y and C/Y Enter the data in and solve for I% – F2 The answer you get will be the rate required.

There are a regular series of payments – so it has to be an annuity question. The money will exist in the FUTURE – so it has to be a future value question. We have the FV the PMT, the term – we haven’t got I%.

N = I% = PV = Pmt = FV = P/Y = C/Y = 4 x 4 ? Solution : 8.08%

8.08%