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Ordinary 10-1

10
Annuities
O
Ordinary A nnuities

Chapter 10
McGraw-Hill
McGraw-HillRyerson©
Ryerson©
Ordinary 10-2
10
Annuities
Learning Objectives
After completing this chapter, you will be able to:
Define and distinguish between…
LO-1 … ordinary simple annuities and ordinary
general annuities
Calculate the…
LO-2 … Future Value and Present Value of
ordinary simple annuities

LO-3 … fair market value of a cash flow stream


that includes an annuity
McGraw-Hill Ryerson©
Ordinary 10-3
10
Annuities
Learning Objectives
Calculate the…

LO-4 … principalbalance owed on a loan


immediately after any payment
LO-5 … Present Value of and period of deferral
of a deferred annuity
LO-6 … Future Value and Present Value of
ordinary general annuities

McGraw-Hill Ryerson©
Ordinary 10-4
10 Terminology
Annuities

LO-1 Annuity
- A series of equal payments at regular
intervals

Term of the Annuity


- the time from the beginning of the first payment period
to the end of the last payment period
Present Value Future Value
the amount of money needed to the future dollar amount of a
invest today in order to series of payments plus interest
receive a series of payments
for a given number of years
in the future
McGraw-Hill Ryerson©
Ordinary 10-5
10 Terminology
Annuities

PMT … is the amount of each payment in an annuity


n … is the number of payments in the annuity

payment interval … is the time between


successive payments in an annuity

ordinary annuities … are ones in which payments


are made
at the end of each payment interval

McGraw-Hill Ryerson©
Ordinary 10-6
10 Terminology
Annuities

Suppose Term
you obtain
48 months or 4years.
a personal
loan payment interval
to be 1 month
repaid by
ordinary annuities
48 equal monthly
payments first payment will be due 1 month after
you receive the loan,
i.e. at the end of the first payment interval

McGraw-Hill Ryerson©
Ordinary 10-7
10 Terminology
Annuities

… for an n-payment Ordinary Annuity


Payment interval

n-1 n Interval
0 1 2 3 number
PMT PMT PMT PMT PMT

Term of the annuity


McGraw-Hill Ryerson©
Ordinary 10-8
10
Annuities
Ordinary Annuity
Ordinary Ordinary
Simple Annuities General Annuities

The payment interval The payment interval

= differs from
the compounding interval the compounding interval

Monthly payments, Monthly payments,


and interest is but interest is
compounded monthly compounded semi-annually
McGraw-Hill Ryerson©
Ordinary Future Value 10-9
10 of an
Annuities Ordinary Simple Annuity
LO-2 Assume that there are four(4) annual $1000 payments
with interest at 4%

0 1 2 3 4 Interval
number
$1000 $1000 $1000 $1000
n=1 $1000 (1.04)1
n=2
$1000 (1.04)2
n=3
$1000 (1.04)3
Sum = FV of annuity
…the sum of the future values of all the payments

McGraw-Hill Ryerson©
Ordinary Future Value 10-10
10 of an
Annuities Ordinary Simple Annuity
Assume that there are four(4) annual $1000 payments
with interest at 4%
0 1 2 3 4 Interval
number
$1000 $1000 $1000 $1000
n = 1 $1000 (1.04)1
n=2
$1000 (1.04)2
n=3
$1000 (1.04)3
Sum = FV of annuity
FV of annuity = $1000 + $1000(1.04) + $1000(1.04)2 + $1000(1.04)3
= $1000 + $1040+ $1081.60 +$1124.86
= $4246.46
McGraw-Hill Ryerson©
Ordinary Future Value 10-11
10 of an
Annuities Ordinary Simple Annuity

Suppose that you vow to save $500 a month for the next
four months, with your first deposit one month from today.
If your savings can earn 3% converted monthly, determine
the total in your account four months from now.

0 1 2 3 4 Month Result
$500 $500 $500 $500
$ 500.00
$500(1+.03/12) 501.25
$500(1+.03/12)2 502.50
$500(1+.03/12)3 503.76
Sum = FV of annuity $2,007.51

McGraw-Hill Ryerson©
Ordinary Future Value 10-12
10 of an
Annuities Ordinary Simple Annuity

Now imagine that you save $500 every month for the
next three years. Although the same logic applies, I
certainly don’t want to do it this way!

Since your ‘account’ was empty when you began…


PV = 0
n = 3 yrs * 12 payments per year = 36 payments

Using the …
McGraw-Hill Ryerson©
Ordinary Future Value 10-13
10 of an
Annuities Ordinary Simple Annuity

You save $500 every month for the next three years.
Assume your savings can earn 3% converted monthly.
Determine the total in your account three years from now.

P/Y==
FV 18810.28
120
Note
Keys direction 3 36 0
12
500

Using the formula


McGraw-Hill Ryerson©
Ordinary Future Value 10-14
10 of an
Annuities Ordinary Simple Annuity

…the sum of the future values of all the payments

Formula FV = PMT [ (1+ i)n - 1


i
]

McGraw-Hill Ryerson©
Ordinary Future Value 10-15
10 of an
Annuities Ordinary Simple Annuity

You save $500 every month for the next three years.
Assume your savings can earn 3% converted monthly.
Determine the total in your account three years from now.

FV = PMT (1+ i)
i
n -1
[ ] 18810.28
37.6206
1.0025
0.0941
0.0025
1.0941

.03 12

1 36

1
500
McGraw-Hill Ryerson©
Ordinary Solving earlier Question 10-16
10 using Annuities
Annuities

You vow to save $500/month for the next four months,


with your first deposit one month from today.
If your savings can earn 3% converted monthly, determine
the total in your account four months from now.

Since your ‘account’ was empty when you began…


PV = 0
n = 4 payments
PMT = -500

McGraw-Hill Ryerson©
Ordinary 10-17
10
Annuities

Cash Flows
..a term that refers to payments
that can be either …

… payments received … payments made


e.g. receipts e.g. cheques
Treated as:
Positives + Negatives -
McGraw-Hill Ryerson©
Therefore…
Ordinary 10-18
10 Cash Flow Sign Convention
Annuities

Therefore…

…when you are making payments,


Really
or even making deposits to savings,
payments to
these are cash outflows, the bank!
and therefore
the values must be negative!

Using the …
McGraw-Hill Ryerson©
Ordinary Future Value 10-19
10 of an
Annuities Ordinary Simple Annuity
PV = 0 n = 4 payments PMT -500
3
You vow to save 0
$500/month for the 12
next four months, FV = 2007.51
with your first 500
deposit one month
from today.
If your savings can 4
earn 3% converted We already have
monthly, determine these from before, so
the total in your we don’t have to enter
account four them again!
months from now.

McGraw-Hill Ryerson©
Formula solution
Ordinary 10-20
You vow to save $500/month for the next
10
four months, with your first deposit
Annuities one month from today. If your savings can
earn 3% converted monthly, determine the
total in your account four months from now.
Formula FV = PMT [ (1+ i)n - 1
i ]
PMT = $500
n= 4
2007.51
4.0150
0.0100
1.0100
1.0025
0.0025
i = .03/12
= 0.0025 .03 12
1 4
1

500
McGraw-Hill Ryerson©
Ordinary 10-21
10 Not seeing the total picture!
Annuities

When you use formula or a


calculator’s financial functions to
calculate an annuity’s
Future Value,
the amount
each payment contributes to
the future value
is NOT apparent!

McGraw-Hill Ryerson©
Ordinary 10-22
10
FV Contributions
Contribution
Annuities 10% Compounded Annually $
FV
$10.00 14.64

$10.00 13.31

$10.00
$10.00 12.10

$10.00 11.00

10.00
0 1 2 3 4 5 $61.05
Years
McGraw-Hill Ryerson©
Ordinary Future Value 10-23
10 of an
Annuities Ordinary Simple Annuity

You decide to save $75/month for the next four years.


If you invest all of these savings in an account which
will pay you 7% compounded monthly, determine:
a) the total in the account after 4 years
b) the amount you deposited
c) the amount of interest earned
Extract necessary data...
PMT = - $75 =7 = 12 n = 4 * 12 = 48
PV = 0 FV = ?
Total Deposits = $75* 48 = $3,600
Solve…
McGraw-Hill Ryerson©
Ordinary 10-24
10
Annuities

P/Y==
FV 4140.69
12
You decide to save
$75/month for the
next four years. 7 48
If you invest all of
these savings in an 0 75
account which will 12
pay you 7%
compounded
monthly, determine: FV……….. $4,140.69
a) the total in the Deposits…... 3,600.00
account after 4 years
b) the amount you Interest Earned = $ 540.69
deposited
c) the amount of
interest earned Formula solution
McGraw-Hill Ryerson©
Ordinary 10-25
10
Annuities
Formula FV = PMT [ (1+ i)n - 1
i ]
1.005833
0.005833
55.20924
0.32205
1.32205
4140.6927
You decide to save
$75/month for the
next four years. .07 12
If you invest all of
these savings in an 1 48
account which will
pay you 7% 1
compounded
monthly, determine:
a) the total in the 75
account after 4 years
b) the amount you FV $4,140.69 - Deposits 3,600.00
deposited = Interest Earned $540.69
c) the amount of
interest earned
McGraw-Hill Ryerson©
Ordinary PresentValue 10-26
10 of an
Annuities Ordinary Simple Annuity

…the sum of the present values of all the payments

Formula PV = PMT [ 1-(1+ i)-n


i
]

McGraw-Hill Ryerson©
Ordinary Present Value 10-27
10 of an
Annuities Ordinary Simple Annuity
Assume that there are four(4) annual $1000
payments with interest at 4%
0 1 2 3 4 Interval
Number
$1000 $1000 $1000 $1000
$1000 (1.04)-1 n=1
n=2
$1000 (1.04)-2
n=3
$1000 (1.04)-3
n=4
$1000 (1.04)-4
Sum = PV of annuity …the sum of the present values of all the
payments
McGraw-Hill Ryerson©
Ordinary Present Value 10-28
10 of an
Annuities Ordinary Simple Annuity
Assume that there are four(4) annual $1000
payments with interest at 4%
0 1 2 3 4 Interval
Number
$1000 $1000 $1000 $1000
$1000 (1.04)-1 n=1
$1000 (1.04)-2 n=2
$1000 (1.04)-3 n=3
$1000 (1.04)-4 n=4
Sum = PV of annuity PV of annuity
= $1000(1.04)-1 + $1000(1.04)-2 + $1000(1.04)-3 + $1000 (1.04)-4
= $961.54 + $924.56 + $889.00 + $854.80
= $3629.90
McGraw-Hill Ryerson©
Ordinary Present Value 10-29
10 of an
Annuities Ordinary Simple Annuity

You overhear your friend saying the he is repaying a


loan at $450 every month for the next nine months.
The interest rate he has been charged is 12%
compounded monthly. Calculate the amount of the
loan, and the amount of interest involved.

…Since you are making payments, not receiving them, PMT = -450
… n = 9 payments … Repaid 9 payments at $450 = $4,050
… Interest - use 12, not .12 when using financial calculator
… At the end of the loan, you don’t owe any money, so FV =0
McGraw-Hill Ryerson© Solve…
Ordinary 10-30
10
Annuities

You PV = 3,918.24
overhear your
friend saying the 12
he is repaying a 8 9 0
loan at $450 every 450
month for the next
nine months.
The interest rate he
has been charged is Amount Borrowed (PV) $ 3,918.24
8% compounded
monthly. Calculate Repaid.…………………. 4,050.00
the amount of the Interest Paid = $ 131.76
loan, and the
amount of interest
involved. Formula solution
McGraw-Hill Ryerson©
Ordinary 10-31
10 Formula PV = PMT [ 1-(1+ i)-n ]
i
Annuities

You -0.0580479
1.006667
0.006667
3,918.24
0.94195
overhear your
friend saying the
he is repaying a .08 12
loan at $450 every
month for the next 1 9
nine months.
The interest rate he 1
has been charged is
8% compounded 450
monthly. Calculate
the amount of the Repaid $4,050.00 - Borrowed $3,918.24
loan, and the
amount of interest = Interest Charged $131.76
involved.
McGraw-Hill Ryerson©
Ordinary 10-32
10
Annuities

Contribution of
Each Payment
to an
Annuity’s Present Value

McGraw-Hill Ryerson©
Ordinary 10-33
10
PV Contributions
PV
Contribution
Annuities $
$10.00 9.09

$10.00 8.20

$10.00
$10.00 7.51

$10.00 6.83

$10.00 6.21

0 1 2 3 4 5 $37.91
McGraw-Hill Ryerson©
Years
Ordinary 10-34
10
Annuities

LO-3

…of a cash flow stream that includes an annuity

McGraw-Hill Ryerson©
Ordinary 10-35
10 You have received two offers on a
Annuities building lot that you want to sell.
LO-3 Ms. Armstrong’s offer is
$25,000 down plus a
$100,000 lump sum payment
five years from now.
Mr. Belcher has offered $20,000 down plus
$5000 every quarter for five years.
Compare the economic values of the two offers
if money can earn 5% compounded annually.

McGraw-Hill Ryerson©
Ordinary 10-36
10 On what information
Annuities
ocu
should we focus?
The economic value of a payment stream
on a particular date (focal date)
refers to
a single amount
that is an
economic substitute for the payment stream
WE need to choose a focal date, and determine the
values of the two offers at that focal date.
(Obvious choices would be today, the date of the
offers, or the end of the term i.e. 5 years from now.)

Back to Offer Comparison


McGraw-Hill Ryerson©
Ordinary 10-37
10 You have received two offers on a building lot that
you want to sell. Ms. Armstrong’s offer is $25,000
Annuities down plus a $100,000 lump sum payment five
years from now. Mr. Belcher has offered $20,000
down plus $5000 every quarter for five years.
Compare the economic values of the two offers if
money can earn 5% compounded annually.

Ms. Armstrong Mr. Belcher


$25,000 down
$20,000 down
plus a $100,000 lump
sum payment plus $5000 every quarter
five years from now for five years

Focal Date: Today

McGraw-Hill Ryerson©
Preparing Time Lines
Ordinary Time Lines 10-38
10 $25,000 down plus a $100,000 lump sum payment
A
Annuities five years from now
B $20,000 down plus $5,000 every quarter for five years
Years
0 1 2 3 4 5
$25,000 Ms. Armstrong $100,000

$20,000 Mr.Belcher
$5000 every quarter
$20,000
$20,000
$20,000
$20,000
$20,000
McGraw-Hill Ryerson©
Ordinary 10-39
10
Annuities
Step 1–Determine today’s value of Ms. Armstrong’s offer
You have received
two offers on a today’s
today’s value
building lot that you PV= 103,352.62
78352.692 ofvalue
Ms. A’s
of
want to sell. Ms. lump sum
Armstrong’s offer is total offer
$25,000 down plus a
$100,000 lump sum 100,000
payment five years
from now. Mr. Belcher 1 5 5
has offered $20,000
down plus $5000 every 0
quarter for five years.
Compare the economic 25,000
values of the two offers
if money can earn 5%
compounded annually.
McGraw-Hill Ryerson©
Step 2…
Ordinary 10-40
10
Annuities Step 2 – Determine today’s value of Mr. Belcher’s offer.
You have received today’s value
today’s
two offers on a of Mr.of
value B’s
building lot that you P/Y
C/Y
PV == 79,376.93
99,376.93
410 lump sum
total offer
want to sell. Ms.
Armstrong’s offer is
$25,000 down plus a 5 0
$100,000 lump sum 4
payment five years 4500
from now. Mr. Belcher
has offered $20,000 20
down plus $5000 every 1
quarter for five years. 20000
Compare the economic
values of the two offers
if money can earn 5%
compounded annually.
McGraw-Hill Ryerson©
Ordinary 10-41
10
Annuities

Total Value
of each offer

Ms. Armstrong $103,352.62


Mr.Belcher 99,376.93
Difference in Offers $ 3,975.69

Better off accepting Ms. Armstrong’s offer!

McGraw-Hill Ryerson©
Ordinary Calculating the 10-42
10
Annuities
Original Loan
LO-4 and a Subsequent Balance
The required monthly payment on
a five-year loan, bearing 8% interest,
compounded monthly, is $249.10.

a) What was the original principal amount of the loan?


b) What is the balance owed just after the twentieth payment?

Since you are “borrowing” money, you are looking for PV


… and FV = 0 once you have repaid the loan!
n = 5 yrs * 12 payments per year = 60 payments

McGraw-Hill Ryerson©
Ordinary 10-43
10 Original Principal = PV of all 60 payments
Annuities
PMT = 249.10 FV = 0 n = 5*12 = 60 i = .08/12 c= 1

The required
monthly payment Original loan
on a five-year loan, PV = 12,285.220 value
bearing 8% interest,
compounded
monthly, is $249.10. 0 8
a) What was the
original principal 12
amount of the loan? 249.10
b) What is the
balance owed just 60
after the twentieth
payment?
McGraw-Hill Ryerson©
Ordinary Balance after 20 payments 10-44
10 = PV of 40 payments left
Annuities
PMT = 249.10 FV = 0 n = 60 - 20 = 40 i = .08

The required
monthly payment New loan
on a five-year loan, PV = 8,720.75 balance
bearing 8% interest,
compounded
monthly, is $249.10.
a) What was the
original principal 40
amount of the loan?
b) What is the
balance owed just We will leave it to you to do
after the twentieth
payment? the algebraic solution…!
McGraw-Hill Ryerson©
Ordinary 10-45
10
Annuities

LO-5
A Deferred Annuity
may be viewed as an
ordinary annuity
that does not begin until a
time interval
(named the period of deferral)
has passed

McGraw-Hill Ryerson©
Ordinary 10-46
10 Deferred Annuities
Annuities
d = Number of payment intervals
in the period of deferral
A Deferred
Annuity Two-step procedure to find PV:
may be viewed as
Calculate the present value, PV1,
an
of the payments at the end of the
ordinary annuity
period of deferral — this is just the
that does not begin
until a time PV of an ordinary annuity
interval Calculate the present value,
(named the period PV2, of the STEP 1 amount
of deferral) at the beginning of the period
has passed
of deferral
McGraw-Hill Ryerson©
Ordinary 10-47
10
Annuities

… your friend saying the he is repaying a loan at $450 every


month for four months. The interest rate he has been charged is
8% compounded monthly. Calculate the amount of the loan, and
the amount of interest involved.

…this same friend doesn’t begin to repay his loan


for another 11 months, at a rate $500 every month
for four months. The interest rate is still 8%
compounded monthly. Determine the size of the loan.

McGraw-Hill Ryerson©
Solve…
Ordinary Present Value 10-48
10 of a
Annuities Deferred Annuity
Step 1 – Determine PV of Annuity 10 months from now

0 10 11 12 13 14 Months
$500 $500 $500 $500

PV…of the Annuity

Step 2 - Discount for 10 months to get today’s Loan Value


Hint: (Use Compound Discount)

McGraw-Hill Ryerson©
Ordinary 10-49
10
Annuities

…this same friend


loan10value
value months
doesn’t begin to PV =
PV
FV - 1967.11
1840.65 today
from now
repay his loan
for another 11
months, at a rate 0 8
$500 every month
500 4
for four months. 12
The interest rate is
still 8%
compounded 0
monthly. 10
Determine the size
of the loan.
McGraw-Hill Ryerson©
Ordinary 10-50
10
Annuities

LO-6 The payment interval


differs from
the compounding interval

e.g. A typical Canadian mortgage has


Monthly payments,
but the interest is
compounded semi-annually

Using calculators…
McGraw-Hill Ryerson©
Ordinary 10-51
10
Annuities

For those who are using See


this type of calculator,
following
the C/Y worksheet REVIEW
will now be used

For those who are using a


non-financial calculator, See
new formulae following
will be added to find the solution

McGraw-Hill Ryerson©
Ordinary 10-52
10
Annuities

We can input the number of


compoundings per year into the
financial calculator.
This can be performed by using
the symbol
To access this symbol use:

…and you will see

McGraw-Hill Ryerson©
Ordinary 10-53
10
The 12
Annuities is a default
setting

This display is referred to as “the worksheet”.


… represents the number of Payments per Year
… represents the number of Compoundings per Year
To access use:

Appears
automatically

Note: You can override these values by entering new ones!

McGraw-Hill Ryerson©
…Example
Ordinary 10-54
10
Annuities

Typical P/Y ==
C/Y 12.00
12.00
2.00
Canadian
Using 12
mortgage
Interest is
compounded
semi-annually 2
and
payments are
each month.

Adding New Formulae


McGraw-Hill Ryerson©
Ordinary 10-55
10
Annuities Adding New Formulae
Step 1 Determine the number of Interest
periods per compounding interval
C= number of interest compoundings per year
number of payments per year
Step 2 Use c to determine i2
Use i2 = (1+i)c - 1 to calculate the equivalent
periodic rate that matches the payment interval
Step 3 Use this equivalent periodic rate as the
value for “i”
in the appropriate simple annuity formula

McGraw-Hill Ryerson©
…Example
Ordinary 10-56
10 Step 1 To determine the number of Interest
Annuities
c
periods per ompounding interval

C = number of interest compoundings per year


number of payments per year
Typical
Canadian
mortgage
6% Interest is 0.166666 = C
compounded
semi-annually
and
payments are 2 12
each month.
Find C and i2.
Step 2 Use c to determine i2
McGraw-Hill Ryerson©
Ordinary 10-57
10 Step 2 Use c to determine i2
Annuities

i2 = (1+i)c - 1
Typical
Canadian i2 = (1+ .06/2).16666 -1
mortgage
6% Interest is
compounded 0.0049
1.0049
0.166666 = i2
semi-annually
and
payments are 1.03
each month. 1
Find C and i2.

McGraw-Hill Ryerson©
…another example
Ordinary 10-58
10
Annuities
Step 1 To determine the number of
compoundings
C = number of interest compoundings per year
Mortgage number of payments per year

5% interest
is 0.23076 = C
compounded
monthly
and 12 52
payments are
each week
Step 2 Use c to determine i2
McGraw-Hill Ryerson©
Ordinary 10-59
10 Step 2 Use c to determine i2
Annuities

i2 = (1+i)c - 1
Mortgage i2 = (1+ .05/12).2308 -1
5% interest
is
compounded 0.00096 = i2
1.0041667
0.230769
1.00096
0.0041667
monthly
and
0.05 12 1
payments are
each week
1
McGraw-Hill Ryerson©
…another example
Ordinary 10-60
10 Is the following a
Annuities General Annuity?
You decide to save $50/month for the next three years.
If you invest all of these savings in an account which will
pay you 7% compounded semi-annually,
determine the total in the account after 3 years.

Criteria
The payment interval
differs from
the compounding interval

As the Criteria have been met, therefore,


we need to determine C
McGraw-Hill Ryerson©
Ordinary 10-61
10 Step 1 Find c
Annuities

0.00575
0.1666
1.00575
You decide to
save $50/month 2 12
for the next
three years. Step 2 Find i2 i2 = (1+i)c - 1
If you invest all
of these savings i2 = (1+ .07/2).1666-1
in an account
which will pay i2 = 0.00575
you 7%
compounded 1.035
semi-annually,
determine the 1
total in the
account after
3 years. Step 3 Use i2
McGraw-Hill Ryerson©
Ordinary 10-62
Step 3 Use i2 in the appropriate formula
10
Annuities Formula FV = PMT [ (1+ i)n - 1
i ]
You decide to PMT = 50 PV = 0 n = 3*12 = 36
save $50/month i = .07/2 c = 2/12 = .16666 i2 = 0.00575
for the next
three years.
If you invest all
of these savings 1.229255
0.229255
0.00575
1993.51
39.8702
1.00575
in an account
which will pay 1 36
you 7%
compounded
semi-annually, 1
determine the
total in the 50
account after
3 years.
McGraw-Hill Ryerson©
Solve…
Ordinary 10-63
10
Annuities

You decide to
save $50/month
for the next P/Y=== 1993.51
C/Y
FV 12
1220
three years.
If you invest all 12
of these savings 50 36
in an account
which will pay
you 7% 2 7 0
compounded
semi-annually,
determine the
total in the
account after
3 years.
McGraw-Hill Ryerson©
Ordinary 10-64
10
C = number of interest compoundings per year
Annuities number of payments per year
the value for c can be a repeating decimal
SAVE c in memory…

…your calculator retains at least


Improving
two more digits than you see displayed!
the
Accuracy of
Calculated when you need the exponent for
Results Simply the c value from memory!

The value for i2 should be saved in


memory as soon you calculate it! it later!

McGraw-Hill Ryerson©
Ordinary 10-65
10
Annuities

Reid David made annual deposits of $1,000


to Fleet Bank, which pays
6% interest
compounded annually.
After 4 years, Reid makes no more deposits.
What will be the balance in the account
10 years after the last deposit?

McGraw-Hill Ryerson©
Ordinary 10-66
10 Reid David made annual deposits of $1,000 to
Fleet Bank, which pays 6% interest compounded
Annuities annually. After 4 years, Reid makes no more
deposits. What will be the balance in the account
10 years after the last deposit?
Step 1 – Determine FV1 of Annuity 10 years from now
0 1 2 3 4 14 Years
$1000 $1000 $1000 $1000

FV1 …of the Annuity


Step 2 – Determine FV using compound interest
FV2
McGraw-Hill Ryerson©
Ordinary 10-67
10
Annuities Step 1 – Determine FV1 of Annuity 10 years from now

Reid David value at


made annual end of
deposits of $1,000 to C/Y
P/Y
FV=== 1.00
1.000
4374.62
Fleet Bank, 4 years
that pays 1
6% interest
compounded 6 0
annually.
After 4 years, Reid 1000 4
makes no more 1
deposits.
What will be the
balance in the
account
10 years after the
last deposit? Step 2…
McGraw-Hill Ryerson©
Ordinary 10-68
10
Annuities
Step 2 – Determine FV2 using compound interest

Reid David
made annual value 14 years
deposits of $1,000 to FV == 7834.27
4374.62 from now
Fleet Bank,
that pays
6% interest 0
compounded
annually.
After 4 years, Reid 10
makes no more
deposits.
What will be the
balance in the
account
10 years after the
last deposit?
McGraw-Hill Ryerson©
Formula solution
Ordinary 10-69
10 Step 1 – Determine FV of Annuity 4 years from now
Annuities n -1
(1+ i)
Formula FV = PMT [ i ]
Reid David PMT = 1000 n = 4 i = 0.06 c = 1
made annual
deposits of $1,000 to
Fleet Bank,
that pays value at end
6% interest 0.262477
1.262477
4374.62 of 4 years
compounded
annually.
After 4 years, Reid 1.06 4
makes no more
deposits. 1 0.06
What will be the
balance in the
account 1000
10 years after the
last deposit? Step 2…
McGraw-Hill Ryerson©
Ordinary 10-70
10 Step 2 – Determine FV using compound interest
Annuities
Formula FV = PV(1 + i)n
Reid David made PV =4374.62 n = 10 i = 0.06
annual deposits of
$1,000 to Fleet Bank,
which pays value 14 years
6% interest 11.262477
0.262477
.1708477
4374.62
7834.27 from now
compounded
annually.
After 4 years, Reid
makes no more 1.06 10
deposits.
What will be the
balance in the account
10 years after the last
deposit?
McGraw-Hill Ryerson©
Ordinary 10-71
10
Annuities Step 1 – Determine FV of Annuity 4 years from now

value at end
How much P/Y
C/Y
C/Y 110
FV === 4386.52
365 of 4 years
more interest 1
will Reid
David 1000 4
accumulate
over the 14 365 6
years if his
0
account earns
6%
compounded
daily?
McGraw-Hill Ryerson©
Ordinary 10-72
10
Annuities
Step 2 – Determine FV in 10 years
using compound interest

value 14 years
How much P/Y
FV
FV== 4386.52
7992.37
36510 from now
more interest
will Reid
David
accumulate 0 3650
over the 14 365
years if his
account earns
6%
compounded
daily?
McGraw-Hill Ryerson©
Ordinary 10-73
10
Annuities

Interest

$7,992.37 $7,834.27

McGraw-Hill Ryerson©
Ordinary 10-74
10
Annuities

This completes Chapter 10

McGraw-Hill Ryerson©