Lecture 10 0

Math 2FM3, Fall 2016, Lecture 10

2.2.3 Continuous Annuities (Continued)

Example: In 2004 and 2005 you deposit 12 every day and in 2006
you deposit 15 every day. The effective annual interest is 9% in 2004
and 2005 and 12% in 2006 with daily compounding. Find the
amount in account at the end of 2006 if:
(a) exactly based on daily deposits.
(b) using continuous deposits as an approximation.
Let j1 be the equivalent daily rate in 2004 and 2005 and j2 be the
equivalent daily rate in 2006. Then (1 + j1 )365 = 1.09 whence
j1 = 0.0002 and (1 + j2 )365 = 1.12 whence j2 = 0.0003. So the

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Lecture 10 1

deposit is

12s730ej1 (1.12) + 15s365ej2 = 16, 502.59.

(b) with continuous deposits, the total per year in 2004 2005 is
12 365 = 4380 and in 2006 is 15 365 = 5475. The accumulate
value is

4380s2e0.09 (1.12) + 5475s1e0.12 = 16, 504.75

The present value at the time payment begins of a continuous

annuity paying at rate 1 per period is
Z n
u 1 n 1 n
anei = du = = .
0 ln (1 + i)

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2.2.4, 2.2.5 Equations of Annuities

Let M be the accumulated value of an annuity with n payments of

amount J each with an interest rate i per payment period:

n1 (1 + i)n 1
M = J[1 + (1 + i) + + (1 + i) ]=J = Jsnei ,
i
This can be regarded as an equation with 4 unknowns M, J, i, n.
Whenever we are given 3 variables, we can solve for the forth.
How much money J we have to put down each of n periods that an
annuity with interest i accumulates to M ? Solve for J to get
J = sMnei
.

How high must interest i be that an annuity with n level payments

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Lecture 10 3

of J accumulates to M ? Let x solve the polynomial

n M M
x x+ 1 = 0,
J J
then i = x 1.
In how many periods n of level payments J does an annuity
accumulate to M ? Solve for n :
Mi


ln J + 1
n= .
ln (1 + i)

The same holds for the present value. The present value of an
annuity with n payments of amount K is L defined by

n
1
L = K[ + 2 + + n ] = K = Kanei .
i

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Lecture 10 4

Solve for K:
Li L
K= n
=
1 anei
Present-value factor solves the polynomial
L L
vn + 1 = 0.
K K
Solve for n to get

Li


ln 1 K
n=
ln

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