Question

What is an annuity and how do you calculate the future value of an ordinary annuity and an annuity due?

Answer 1

In general terms, an annuity is a series of payment either paid or received at equal intervals either at the end or at the beginning .

Annuity can also be defined as a contract between you and insurance company in which you make a lump sum payment and receive equal payment at equal interval for the specified time period either at the beginning or end of the time intervals.

When the payment is made at the end of the interval, it is called ordinary annuity. Whereas, when the payment is made at the beginning of the interval it is called annuity due.

Future value of ordinary annuity = Pmt [(1+r/m)^n×m - 1 / (r/m) ]

Where, Pmt = periodic payment at the end

R = rate of interest

M= time intervals (eg:- monthly, quarterly, etc)

N= time period

Future value of annuity due = Pmt [(1+r/m)^n×m - 1] (1+r/m) / (r/m)

Where, Pmt = periodic payment at the end

R = rate of interest

M= time intervals (eg:- monthly, quarterly, etc)

N= time period