Question

Define and explain how to calculate the future and present value of annuity

Answer 1

Solution:

Future value of annuity: Future value of annuity is the amount to be paid in future at specific date for a series of payment made.

Future value of annuity is calculated by using the following formula:

Ordinary annuity (Payment at the end of period) = A * {[(1+i)^n-1] /i)

Where A = Periodical annuity payments

i = Interest rate

n= period

Annuity due (Payment at the beginning of period) = A * {[(1+i)^n-1] /i) * (1+i)

Where A = Periodical annuity payments

i = Interest rate

n= period

Present Value of annuity:

The present value of an annuity is the current value of future payments from an annuity using specified rate of interest or discount rate.

Present value of annuity is calculated by using the following formula:

Ordinary annuity (Payment at the end of period) = A * {[1 - (1+i)^-n] /i)

Where A = Periodical annuity payments

i = Interest rate

n= period

Annuity due (Payment at the beginning of period) = A * {[1 - (1+i)^-n] /i) * (1+i)

Where A = Periodical annuity payments

i = Interest rate

n= period