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Questions and Answers
What is a deferred annuity?
What is a deferred annuity?
- An annuity that starts immediately.
- An annuity that doesn't start until a period of time has passed. (correct)
- An annuity with a guaranteed rate of return.
- An annuity with variable interest rates.
What is the term for the period before an annuity starts paying out?
What is the term for the period before an annuity starts paying out?
- Accrual period
- Deferral period (correct)
- Payment period
- Vesting period
What is a perpetuity?
What is a perpetuity?
- An annuity that has a high risk of default.
- An initial invested amount that provides payments forever. (correct)
- An annuity that pays out for a fixed number of years.
- An annuity that is tax-exempt.
In the basic perpetuity formula, what does i represent?
In the basic perpetuity formula, what does i represent?
What is the key difference between a deferred annuity and a regular immediate annuity?
What is the key difference between a deferred annuity and a regular immediate annuity?
What is a defining characteristic of a perpetuity?
What is a defining characteristic of a perpetuity?
What happens to the initial investment in a perpetuity?
What happens to the initial investment in a perpetuity?
What is required to calculate annuities that don't happen at the end of each payment?
What is required to calculate annuities that don't happen at the end of each payment?
A scholarship fund is created where the interest earned each year is used to fund scholarships. What type of financial instrument is this?
A scholarship fund is created where the interest earned each year is used to fund scholarships. What type of financial instrument is this?
What is the main purpose of a deferred annuity?
What is the main purpose of a deferred annuity?
A charity establishes a fund where the interest earned is continuously reinvested. Is this is a perpetuity?
A charity establishes a fund where the interest earned is continuously reinvested. Is this is a perpetuity?
A deferred annuity starts making payments 5 years after the initial investment. What is this 5-year period called?
A deferred annuity starts making payments 5 years after the initial investment. What is this 5-year period called?
Which type of annuity would be most beneficial for someone planning for their retirement?
Which type of annuity would be most beneficial for someone planning for their retirement?
For general annuities, what replaces i in calculations?
For general annuities, what replaces i in calculations?
A perpetuity is designed to provide payments for:
A perpetuity is designed to provide payments for:
What is the most important characteristic of the deferral period?
What is the most important characteristic of the deferral period?
The interest earned during the deferral period is:
The interest earned during the deferral period is:
Which formula is used to calculate the present value of a perpetuity when payments are made at the end of each period, and the payment interval equals the compounding frequency?
Which formula is used to calculate the present value of a perpetuity when payments are made at the end of each period, and the payment interval equals the compounding frequency?
Which formula is used to calculate the present value of a perpetuity when payments are made at the beginning of each period, and the payment interval equals the compounding frequency?
Which formula is used to calculate the present value of a perpetuity when payments are made at the beginning of each period, and the payment interval equals the compounding frequency?
Which formula is used to calculate the present value of a perpetuity when payments are made at the end of each period, and the payment interval doesn't equal the compounding frequency?
Which formula is used to calculate the present value of a perpetuity when payments are made at the end of each period, and the payment interval doesn't equal the compounding frequency?
Which formula is used to calculate the present value of a perpetuity when payments are made at the beginning of each period, and the payment interval does't equal the compounding frequency?
Which formula is used to calculate the present value of a perpetuity when payments are made at the beginning of each period, and the payment interval does't equal the compounding frequency?
What is the root word for perpetuity?
What is the root word for perpetuity?
A timeline of a deferred annuity shows:
A timeline of a deferred annuity shows:
What must be earned so that a perpetuity can make monthly payments?
What must be earned so that a perpetuity can make monthly payments?
Does the payment happen at the beginning or end of the payment period?
Does the payment happen at the beginning or end of the payment period?
What is the first step when completing annuity-related calculations?
What is the first step when completing annuity-related calculations?
What is a factor in deciding the formula for completing annuity calculations?
What is a factor in deciding the formula for completing annuity calculations?
If money can earn 6.2% compounded quarterly and, the scholarships are to be paid out at the end of each year, how much needs to be donated to fund this perpetuity?
If money can earn 6.2% compounded quarterly and, the scholarships are to be paid out at the end of each year, how much needs to be donated to fund this perpetuity?
If a donation will only provide the university with $60,000 at the end of each quarter in perpetuity, what is that donation called?
If a donation will only provide the university with $60,000 at the end of each quarter in perpetuity, what is that donation called?
What is added to general annuities to account for early payments?
What is added to general annuities to account for early payments?
What is invested in a perpetuity?
What is invested in a perpetuity?
What should be ensured when finding PV1 using the calculator?
What should be ensured when finding PV1 using the calculator?
In the calculator function when solving for X to find the deferral period, what mode should the calculator be in?
In the calculator function when solving for X to find the deferral period, what mode should the calculator be in?
If you are calculating the periodic payment and your calculator is in BGN mode, what mode should you switch it to?
If you are calculating the periodic payment and your calculator is in BGN mode, what mode should you switch it to?
What is the first step to figuring out the periodic payment amounts when dealing with a deferral period?
What is the first step to figuring out the periodic payment amounts when dealing with a deferral period?
Are perpetuities a form of annuity?
Are perpetuities a form of annuity?
Flashcards
Deferred Annuity
Deferred Annuity
A normal annuity that doesn't start until a period of time has passed.
Deferral Period
Deferral Period
The time that passes until the annuity starts.
Perpetuity
Perpetuity
Something that lasts forever or for an indefinite period.
Perpetuity (Annuity View)
Perpetuity (Annuity View)
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Perpetuity Formula
Perpetuity Formula
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General Annuities (Perpetuities)
General Annuities (Perpetuities)
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Annuities Due (Perpetuities)
Annuities Due (Perpetuities)
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Payment at beginning - general perpetuity
Payment at beginning - general perpetuity
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Payment at end - ordinary general perpetuity
Payment at end - ordinary general perpetuity
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Payment at beginning- simple perpetuity due
Payment at beginning- simple perpetuity due
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Payment at end - ordinary simple perpetuity
Payment at end - ordinary simple perpetuity
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Study Notes
Deferred Annuities
- A deferred annuity is a normal annuity that begins after a period of time has passed.
- The deferral period refers to the time that passes before the annuity starts.
- As an example, an annuity of $100 at the end of each month for three years does not start for one year.
Calculating the Present Value (PV) of a Deferred Annuity
- For example, calculating single amount deposit require for Tom to withdraw $400 at the end of each month for 3 years, earning 8% compounded semi-annually, with 2 year deferral.
- Step 1: Solve for PV1, which is an annuity problem and compounding interval is not equal to the payment interval
- Step 2: Solve for PV2.
- PV1 solution using the calculator results in -$12,789.21
- PV2 solution using the calculator results in -$10,932.27
Calculating the Length of the Deferral Period
- For example, the length calculation of the deferral period from $20,523.22. annuity with 20 quarterly payments of $1,500, 8% compounded quarterly.
- Ensure calculator is in BGN (beginning) mode during calculations
- Solve for PVI to get to -$25,017.69
- The deferral period is 2.5 years.
Calculating the periodic payment in a deferral period
- For example, Sally's furniture has a deal on a couch priced at $1,450, the "no money down don't pay for a year event" starts when you purchase the couch.
- Monthly payments are required if the couch must be paid off in 12 equal payments due at the beginning of each month one year from the purchase date.
- Sally is earning 10% compounded quarterly during both the deferral and repayment periods.
- Solve for FV1 calculator method to get -$1,600.53
- Solve for PMT(x) calulator method to get $139.50, while ensuring the calculator is in BGN mode.
Perpetuities
- A perpetuity is something that lasts forever or for an indefinite period
- It is an initial invested amount that provides a payment forever.
- Perpetuity is possible if $10,000 is put into a scholarship fund with a 10% interest, the scholarships each year could be $1,000.
- The initial invested amount provides a payment forever.
- Basic Formula: PV = PMT/i
- PV = Present Value
- PMT = Payment Value
- i = Periodic interest
- General Annuities: replace i with i2
- Annuities Due: Add an extra portion of PMT to the equation
Calculating the Endowment Required (PV) to Sustain a Perpetuity
- The Calgary Construction Association wishes to establish a scholarship fund at SAIT that pays out five $2,000 awards annually to apprentices.
- It needs to be known how much needs to be donated if money can earn 6.2% compounded quarterly and the scholarships are to be paid out at the end of each year.
Calculating the Required Rate of Return
- With $50,000 deposited, find what monthly rate of return must be earned so the perpetuity can pay $400 at the end of each month
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