10 Questions
What is the primary purpose of a Future Value Annuity (FVA)?
To accumulate a sum of money in the future
What type of interest is applied to the accumulating amount in a Future Value Annuity?
Compound interest
What is the formula to calculate the Future Value of an Annuity?
FV = P * ((1 + i)^n - 1) / i
What is the primary purpose of a Present Value Annuity (PVA)?
To pay off a loan or debt over time
What is the formula to calculate the Present Value of an Annuity?
PV = P * ((1 + i)^-n) / i
What is the main difference between a Future Value Annuity and a Present Value Annuity?
One accumulates money, while the other repays debt.
What is the effect of an increase in the interest rate on the Future Value of an Annuity?
It increases the Future Value.
If the number of periods in a Present Value Annuity increases, what happens to the Present Value?
It increases.
What happens to the Future Value of an Annuity if the payment amount per period increases?
It increases.
If the interest rate per period decreases in a Present Value Annuity, what happens to the Present Value?
It increases.
Study Notes
Annuities
- An annuity is a series of equal payments made at regular intervals over a specified period.
- Annuities are commonly used in savings plans, retirement funds, loans, and mortgages.
- Understanding the time value of money and how interest affects the accumulation or repayment of funds is crucial for managing annuities.
Types of Annuities
-
Future Value Annuity (FVA) accumulates a sum of money in the future by making regular deposits.
-
FVA is commonly used in savings accounts, retirement funds, and investment funds.
-
Compound interest is applied on the accumulating amount in FVA.
-
Present Value Annuity (PVA) pays off a loan or debt over time with regular payments.
-
PVA is commonly used in loan repayments and mortgage bonds.
-
Compound interest is applied to the reducing balance of the loan in PVA.
Future Value of an Annuity
- The future value of an annuity formula calculates the total value of the investment after all payments have been made and compounded with interest over the investment period.
- The formula for FV is: FV = P ((1 + i)^n - 1) / i.
- FV represents the future value of the annuity.
- P represents the payment amount per period.
- i represents the interest rate per period.
- n represents the number of periods.
Present Value of an Annuity
- The present value of an annuity formula calculates the initial amount required to achieve a series of future payments or the current value of the series of payments needed to repay a loan.
- The formula for PV is: PV = P (1 - (1 + i)^(-n)) / i.
- PV represents the present value of the annuity.
- P represents the payment amount per period.
- i represents the interest rate per period.
- n represents the number of periods.
Annuities
- An annuity is a series of equal payments made at regular intervals over a specified period.
- Annuities are commonly used in savings plans, retirement funds, loans, and mortgages.
- Understanding the time value of money and how interest affects the accumulation or repayment of funds is crucial for managing annuities.
Types of Annuities
-
Future Value Annuity (FVA) accumulates a sum of money in the future by making regular deposits.
-
FVA is commonly used in savings accounts, retirement funds, and investment funds.
-
Compound interest is applied on the accumulating amount in FVA.
-
Present Value Annuity (PVA) pays off a loan or debt over time with regular payments.
-
PVA is commonly used in loan repayments and mortgage bonds.
-
Compound interest is applied to the reducing balance of the loan in PVA.
Future Value of an Annuity
- The future value of an annuity formula calculates the total value of the investment after all payments have been made and compounded with interest over the investment period.
- The formula for FV is: FV = P ((1 + i)^n - 1) / i.
- FV represents the future value of the annuity.
- P represents the payment amount per period.
- i represents the interest rate per period.
- n represents the number of periods.
Present Value of an Annuity
- The present value of an annuity formula calculates the initial amount required to achieve a series of future payments or the current value of the series of payments needed to repay a loan.
- The formula for PV is: PV = P (1 - (1 + i)^(-n)) / i.
- PV represents the present value of the annuity.
- P represents the payment amount per period.
- i represents the interest rate per period.
- n represents the number of periods.
Learn about annuities, including types and their uses, and understand how to manage them with knowledge of the time value of money and interest. Explore savings plans, retirement funds, loans, and mortgages.
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