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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

that includes an annuity

McGraw-Hill Ryerson©

Ordinary 10-3

10

Annuities

Learning Objectives

Calculate the…

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

- 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

n … is the number of payments in the annuity

successive payments in an annuity

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

Payment interval

n-1 n Interval

0 1 2 3 number

PMT PMT PMT PMT PMT

McGraw-Hill Ryerson©

Ordinary 10-8

10

Annuities

Ordinary Annuity

Ordinary Ordinary

Simple Annuities General Annuities

= differs from

the compounding interval the compounding interval

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!

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

McGraw-Hill Ryerson©

Ordinary Future Value 10-14

10 of an

Annuities Ordinary Simple Annuity

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

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.

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 …

e.g. receipts e.g. cheques

Treated as:

Positives + Negatives -

McGraw-Hill Ryerson©

Therefore…

Ordinary 10-18

10 Cash Flow Sign Convention

Annuities

Therefore…

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

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

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

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

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

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.)

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.

$25,000 down

$20,000 down

plus a $100,000 lump

sum payment plus $5000 every quarter

five years from now for five years

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

Mr.Belcher 99,376.93

Difference in Offers $ 3,975.69

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.

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

… 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

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.

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

Hint: (Use Compound Discount)

McGraw-Hill Ryerson©

Ordinary 10-49

10

Annuities

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

differs from

the compounding interval

Monthly payments,

but the interest is

compounded semi-annually

Using calculators…

McGraw-Hill Ryerson©

Ordinary 10-51

10

Annuities

this type of calculator,

following

the C/Y worksheet REVIEW

will now be used

non-financial calculator, See

new formulae following

will be added to find the solution

McGraw-Hill Ryerson©

Ordinary 10-52

10

Annuities

compoundings per year into the

financial calculator.

This can be performed by using

the symbol

To access this symbol use:

McGraw-Hill Ryerson©

Ordinary 10-53

10

The 12

Annuities is a default

setting

… represents the number of Payments per Year

… represents the number of Compoundings per Year

To access use:

Appears

automatically

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.

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

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

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…

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!

memory as soon you calculate it! it later!

McGraw-Hill Ryerson©

Ordinary 10-65

10

Annuities

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

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

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

McGraw-Hill Ryerson©

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