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Ordinary
Ordinary
10
O
Ordinary A nnuities
Annuities
Annuities
Chapter 10
McGraw-Hill
McGraw-HillRyerson
Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
Learning Objectives
Calculate the
LO-2 Future Value and Present Value of
ordinary simple annuities
LO-3
McGraw-Hill Ryerson
fair market
10-2
Ordinary
Ordinary
10
Annuities
Annuities
Learning Objectives
Calculate the
LO-4
principal
LO-5
LO-6
McGraw-Hill Ryerson
10-3
10-4
Ordinary
Ordinary
Terminology
10
Annuities
Annuities
Annuity
LO-1
Present Value
the amount of money needed to
invest today in order to
receive a series of payments
for a given number of years
in the future
McGraw-Hill Ryerson
Future Value
the future dollar amount of a
series of payments plus interest
Ordinary
Ordinary
10
10-5
Terminology
Annuities
Annuities
Ordinary
Ordinary
10
10-6
Terminology
Annuities
Annuities
Suppose
you obtain
a personal
loan
to be
repaid by
48 equal monthly
payments
McGraw-Hill Ryerson
Term
48 months or 4years.
payment interval
1 month
ordinary annuities
first payment will be due 1 month after
you receive the loan,
i.e. at the end of the first payment
interval
10-7
Ordinary
Ordinary
Terminology
10
Annuities
Annuities
PMT
PMT
n-1
Interval
number
10-8
Ordinary
Ordinary
10
Annuities
Annuities
Ordinary Annuity
Ordinary
Ordinary
impleA
Annuities
nnuities
SSimple
The payment
payment interval
interval
The
==
Ordinary
Ordinary
General
eneralA
Annuities
nnuities
G
The payment
payment interval
interval
The
differs from
from
differs
the compounding
compounding
the
interval
interval
Monthlypayments,
payments,
Monthly
andinterest
interestisis
and
compoundedmonthly
monthly
compounded
McGraw-Hill Ryerson
the compounding
compounding interval
interval
the
Monthlypayments,
payments,
Monthly
butinterest
interestisis
but
compoundedsemi-annually
semi-annually
compounded
Ordinary
Ordinary
10
Annuities
Annuities
10-9
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
$1000
$1000
3
$1000
n=1
n=2
n=3
4 Interval
number
$1000
$1000 (1.04)1
$1000 (1.04)2
$1000 (1.04)3
Sum = FV of annuity
the sum of the future values of all the payments
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
10-10
1
$1000
4 Interval
number
$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
2
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
Ordinary
Ordinary
10
Annuities
Annuities
10-11
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
$500
2
$500
4 Month
3
$500
$500
$500(1+.03/12)
$500(1+.03/12)2
$500(1+.03/12)3
Sum = FV of annuity
McGraw-Hill Ryerson
Result
Result
$ 500.00
501.25
502.50
503.76
$2,007.51
Ordinary
Ordinary
10
Annuities
Annuities
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
10-12
Now imagine that you save $500 every month for the
next three years. Although the same logic applies, I
certainly dont 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
Ordinary
10
Annuities
Annuities
10-13
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
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.
12
Note
Note
Keys direction
FV
P/Y==
3
18810.28
120
36
500
McGraw-Hill Ryerson
Using the
the formula
formula
Using
Ordinary
Ordinary
10
Annuities
Annuities
the
Formula
Formula
McGraw-Hill Ryerson
10-14
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
FV
= PMT [
(1+ i)n - 1
Ordinary
Ordinary
10
Annuities
Annuities
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
10-15
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.
n
FV = PMT (1+ i) - 1
i
18810.28
37.6206
1.0025
0.0941
0.0025
1.0941
12
.03
1
1
500
McGraw-Hill Ryerson
]
36
Ordinary
Ordinary
10
Solvingearlier
earlierQuestion
Question
Solving
usingAnnuities
Annuities
using
10-16
Annuities
Annuities
PV = 0
n = 4 payments
PMT = -500
McGraw-Hill Ryerson
10-17
Ordinary
Ordinary
10
Annuities
Annuities
CashFlows
Flows
Cash
..a term
term that
that refers
refers to
to payments
payments
..a
that can
can be
be either
either
that
payments received
e.g. receipts
Positives
Positives
++
McGraw-Hill Ryerson
Treated as:
as:
Treated
payments made
e.g. cheques
Negatives
Negatives
--
Therefore
Therefore
10-18
Ordinary
Ordinary
10
Annuities
Annuities
Therefore
Therefore
when you are making payments,
or even making deposits to
savings,
these are cash outflows,
Really
Really
payments to
to
payments
the bank!
bank!
the
and therefore
the values must be negative!
Using the
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
PV = 0 n = 4 payments PMT -500
10-19
3
Youvow
vowto
tosave
save
0
You
12
$500/monthfor
forthe
the
$500/month
FV = 2007.51
next
four
months,
next four months,
500
with
your
first
with your first
depositone
onemonth
month
deposit
fromtoday.
today.
from
4
If
your
If your
savingscan
canearn
earn
savings
We already
already have
have
We
3%converted
converted
3%
these from
from before,
before, so
so
these
monthly,determine
determine we dont have to enter
monthly,
have to enter
thetotal
totalin
inyour
your we dont
the
them again!
again!
them
account
four
account four
monthsfrom
fromnow.
now.
months
Formula solution
solution
Formula
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
10-20
Youvow
vowtotosave
save$500/month
$500/monthfor
forthe
thenext
next
You
fourmonths,
months,with
withyour
yourfirst
firstdeposit
deposit
four
onemonth
monthfrom
fromtoday.
today.IfIfyour
yoursavings
savingscan
can
one
earn3%
3% converted
convertedmonthly,
monthly,determine
determinethe
the
earn
totalin
inyour
youraccount
accountfour
fourmonths
monthsfrom
fromnow.
now.
total
n
(1+
i)
-1
Formula
FV
=
PMT
Formula
PMT = $500
n= 4
i = .03/12
= 0.0025
2007.51
4.0150
0.0100
1.0100
1.0025
0.0025
.03
12
1
1
500
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
the amount
each payment
contributes to the future value
is
NOT apparent!
McGraw-Hill Ryerson
10-21
Ordinary
Ordinary
10-22
FV Contributions
Contributions
FV
10
Contribution
10%Compounded
CompoundedAnnually
Annually
10%
FV $
FV
$10.00
14.64
$10.00
Annuities
Annuities
$10.00
$10.00
$10.00
$10.00
13.31
$10.00
$10.00
12.10
$10.00
$10.00
11.00
10.00
0
McGraw-Hill Ryerson
3
Years
Years
5 $61.05
$61.05
Ordinary
Ordinary
10
Annuities
Annuities
FutureValue
Value
Future
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
10-23
PMT = - $75
=7
= 12 n = 4 * 12 = 48
PV = 0
FV = ?
Total Deposits = $75* 48 = $3,600
Solve
McGraw-Hill Ryerson
10-24
Ordinary
Ordinary
10
Annuities
Annuities
Youdecide
decideto
tosave
save
You
$75/monthfor
forthe
the
$75/month
nextfour
fouryears.
years.
next
youinvest
invest
IfIfyou
allof
ofthese
thesesavings
savings
all
inan
anaccount
accountwhich
which
in
willpay
payyou
you7%
7%
will
compounded
compounded
monthly,determine:
determine:
monthly,
a)the
thetotal
totalin
inthe
the
a)
accountafter
after44years
years
account
b)the
theamount
amountyou
you
b)
deposited
deposited
theamount
amount
c)c)the
ofinterest
interestearned
earned
of
McGraw-Hill Ryerson
FV
P/Y==
7
12
4140.69
12
48
75
FV.. $4,140.69
Deposits... 3,600.00
Interest Earned = $ 540.69
Formulasolution
solution
Formula
Ordinary
Ordinary
10
Formula FV = PMT
Formula
Annuities
Annuities
Youdecide
decideto
tosave
save
You
$75/monthfor
forthe
the
$75/month
nextfour
fouryears.
years.
next
youinvest
invest
IfIfyou
allof
ofthese
thesesavings
savings
all
inan
anaccount
accountwhich
which
in
willpay
payyou
you7%
7%
will
compounded
compounded
monthly,determine:
determine:
monthly,
a)the
thetotal
totalin
inthe
the
a)
accountafter
after44years
years
account
b)the
theamount
amountyou
you
b)
deposited
deposited
theamount
amount
c)c)the
ofinterest
interestearned
earned
of
McGraw-Hill Ryerson
(1+ i)n - 1
i
10-25
1.005833
0.005833
55.20924
0.32205
1.32205
4140.6927
.07
12
48
1
75
FV $4,140.69 - Deposits 3,600.00
Ordinary
Ordinary
10
Annuities
Annuities
the
10-26
PresentValue
PresentValue
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
Formula
Formula
McGraw-Hill Ryerson
PV
= PMT [
1-(1+ i)-n
PresentValue
Value
Present
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
Assume that there are four(4) annual $1000
payments with interest at 4%
Ordinary
Ordinary
10
Annuities
Annuities
0
$1000 (1.04)-1
$1000 (1.04)
-2
$1000 (1.04)
-3
$1000 (1.04)
Sum = PV of annuity
-4
McGraw-Hill Ryerson
1
$1000
n=1
2
$1000
3
$1000
10-27
4 Interval
Number
$1000
n=2
n=3
n=4
the sum of the present values of all the
payments
Ordinary
Ordinary
10
Annuities
Annuities
PresentValue
Value
Present
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
Assume that there are four(4) annual $1000
payments with interest at 4%
1
$1000
n=1
2
$1000
3
$1000
10-28
4 Interval
Number
$1000
$1000 (1.04)-1
n=2
$1000 (1.04)-2
n=3
$1000 (1.04)-3
n=4
$1000 (1.04)-4
PV of annuity
Sum = 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
Ordinary
10
Annuities
Annuities
PresentValue
Value
Present
an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary
10-29
Interest
Interest -- use
use 12
12,, not
not .12
.12 when
when using
using financial
financial calculator
calculator
At the end of the loan, you dont owe any money, so FV = 0
McGraw-Hill Ryerson
Solve
10-30
Ordinary
Ordinary
10
Annuities
Annuities
PV = 3,918.24
Youoverhear
overhearyour
your
You
friendsaying
sayingthe
the
friend
heisisrepaying
repayingaa
he
loanat
at$450
$450every
every
loan
monthfor
forthe
thenext
next
month
ninemonths.
months.
nine
Theinterest
interestrate
ratehe
he
The
hasbeen
beencharged
chargedisis
has
8%compounded
compounded
8%
monthly. Calculate
Calculate
monthly.
theamount
amountof
ofthe
the
the
loan,and
andthe
the
loan,
amountof
ofinterest
interest
amount
involved.
involved.
McGraw-Hill Ryerson
12
450
131.76
Formula solution
solution
Formula
Ordinary
Ordinary
10
PV = PMT
Formula
Formula
Annuities
Annuities
1-(1+ i)-n
i
10-31
-0.0580479
1.006667
0.006667
3,918.24
0.94195
Youoverhear
overhearyour
your
You
friendsaying
sayingthe
the
friend
heisisrepaying
repayingaa
he
loanat
at$450
$450every
every
loan
monthfor
forthe
thenext
next
month
ninemonths.
months.
nine
Theinterest
interestrate
ratehe
he
The
hasbeen
beencharged
chargedisis
has
8%compounded
compounded
8%
monthly. Calculate
Calculate
monthly.
theamount
amountof
ofthe
the
the
loan,and
andthe
the
loan,
amountof
ofinterest
interest
amount
involved.
involved.
McGraw-Hill Ryerson
.08
12
1
450
Repaid $4,050.00 - Borrowed $3,918.24
10-32
Ordinary
Ordinary
10
Annuities
Annuities
Contribution of
Each Payment
to an
Annuitys
Present Value
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
PV
PV
PV Contributions
Contributions
PV
8.20
$10.00
$10.00
$10.00
$10.00
7.51
$10.00
$10.00
$10.00
$10.00
6.83
$10.00
$10.00
McGraw-Hill Ryerson
Contribution
$
9.09
$10.00
$10.00
10-33
3
Years
Years
6.21
5 $37.91
$37.91
Ordinary
Ordinary
10-34
10
Annuities
Annuities
LO-3
of a cash flow
McGraw-Hill Ryerson
Ordinary
Ordinary
10-35
10
LO-3
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
On what
what information
information
On
ocuwe
should
we
should
ocus?
The economic value
of a payment stream
ffocus?
10-36
Back to
to Offer
OfferComparison
Comparison
Back
10-37
Ordinary
Ordinary
10
Annuities
Annuities
Ms. Armstrong
$25,000 down
Mr. Belcher
$20,000 down
McGraw-Hill Ryerson
Time Lines
Ordinary
Ordinary
10
Annuities
Annuities
Years
$25,000
Ms. Armstrong
$20,000
Mr.Belcher
$5000 every quarter
$20,000
$20,000
$20,000
$20,000
$20,000
McGraw-Hill Ryerson
10-38
5
$100,000
10-39
Ordinary
Ordinary
10
Annuities
Annuities
PV= 103,352.62
78352.692
todays
value
todays
todays
value
todays
ofMs.
Ms.
As
value
of
of
As
value
of
lump
sum
total
offer
lump
sum
total
offer
100,000
1
0
25,000
Step2
2
Step
10-40
Ordinary
Ordinary
10
Annuities
Annuities
P/Y
C/Y
PV == 79,376.93
99,376.93
410
5
4500
20
1
20000
todays
value
todays
value
todays
todays
of
Mr.Bs
Bs
value
of
ofvalue
Mr.
of
total
lumpsum
sum
total
lump
offer
offer
10-41
Ordinary
Ordinary
10
Annuities
Annuities
TotalValue
Value
Total
eachoffer
offer
ofofeach
Ms. Armstrong
Mr.Belcher
$103,352.62
99,376.93
Difference in Offers $
3,975.69
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Annuities
Annuities
LO-4
Calculating the
the
Calculating
10-42
Original Loan
Loan
Original
and aa Subsequent
Subsequent
and
Balance
Balance
yrs ** 12
12 payments
payments per
peryear
year == 60
60 payments
payments
nn == 55 yrs
McGraw-Hill Ryerson
10-43
Ordinary
Ordinary
10
Annuities
Annuities
The required
required
The
monthly payment
payment
monthly
on aa five-year
five-yearloan,
loan,
on
bearing 8%
8% interest,
interest,
bearing
compounded
compounded
monthly, isis $249.10.
$249.10.
monthly,
a) What
What was
was the
the
a)
original principal
principal
original
amount of
of the
the loan?
loan?
amount
b) What
What isis the
the
b)
balance owed
owed just
just
balance
afterthe
the twentieth
twentieth
after
payment?
payment?
McGraw-Hill Ryerson
n = 5*12 = 60 i = .08/12
Originalloan
loan
Original
value
value
PV = 12,285.220
0
12
249.10
60
c=
Ordinary
Ordinary
10
Annuities
Annuities
10-44
Balance after 20 payments
= PV
of 40
PMT = 249.10
FV payments
= 0 n = 60left
- 20 = 40 i = .08
The required
required
The
monthly payment
payment
monthly
on aa five-year
five-yearloan,
loan,
on
bearing 8%
8% interest,
interest,
bearing
compounded
compounded
monthly, isis $249.10.
$249.10.
monthly,
a) What
What was
was the
the
a)
original principal
principal
original
amount of
of the
the loan?
loan?
amount
b) What
What isis the
the
b)
balance owed
owed just
just
balance
afterthe
the twentieth
twentieth
after
payment?
payment?
McGraw-Hill Ryerson
PV =
8,720.75
Newloan
loan
New
balance
balance
40
We will
will leave
leave itit to
to you
you to
to do
do
We
the algebraic
algebraic solution!
solution!
the
10-45
Ordinary
Ordinary
10
Annuities
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
10-46
Ordinary
Ordinary
10
Deferred Annuities
Annuities
Annuities
Annuity
Annuity
maybe
beviewed
viewedas
as
may
an
an
ordinaryannuity
annuity
ordinary
thatdoes
doesnot
notbegin
begin
that
untilaatime
time
until
interval
interval
(namedthe
theperiod
period
(named
deferral)
ofofdeferral)
haspassed
passed
has
McGraw-Hill Ryerson
Two-step procedure
procedure to
to find
find PV:
PV:
Two-step
Calculate the present value, PV1,
of the payments at the end of the
period of deferral this is just the
PV of an ordinary annuity
Calculate the present value,
PV2, of the STEP 1 amount
at the beginning of the period
of deferral
10-47
Ordinary
Ordinary
10
Annuities
Annuities
your
yourfriend
friendsaying
sayingthe
thehe
heisisrepaying
repayingaaloan
loanat
at$450
$450every
every
monthfor
forfour
fourmonths.
months. The
Theinterest
interestrate
ratehe
hehas
hasbeen
beencharged
chargedisis
month
8%compounded
compoundedmonthly.
monthly. Calculate
Calculatethe
theamount
amountof
ofthe
theloan,
loan,and
and
8%
theamount
amountof
ofinterest
interestinvolved.
involved.
the
thissame
samefriend
frienddoesnt
doesntbegin
begintotorepay
repayhis
hisloan
loan
this
foranother
another11
11months,
months,atataarate
rate$500
$500every
every
for
month
forfour
fourmonths.
months. The
Theinterest
interest
month
for
rateisisstill
still8%
8%
compoundedmonthly.
monthly.
rate
compounded
Determinethe
thesize
sizeof
ofthe
theloan
loan. .
Determine
McGraw-Hill Ryerson
Solve
Ordinary
Ordinary
10
Annuities
Annuities
10-48
PresentValue
Value
Present
ofofaa
DeferredAnnuity
Annuity
Deferred
10
11
$500
12
$500
13
$500
14 Months
$500
McGraw-Hill Ryerson
10-49
Ordinary
Ordinary
10
Annuities
Annuities
thissame
samefriend
friend
this
doesntbegin
begintoto
doesnt
repayhis
hisloan
loan
repay
for
for
another11
11months,
months,
another
rate$500
$500
atataarate
everymonth
month
every
forfour
four
for
months. The
The
months.
interestrate
rateisisstill
still
interest
8%
8%
compounded
compounded
monthly.
monthly.
Determinethe
thesize
size
Determine
McGraw-Hill Ryerson
PV
PV =
FV
0
12
loan
value
value
10
months
loan
value
value
10
months
today
fromnow
now
today
from
- 1967.11
1840.65
8
500
4
0
10
10-50
Ordinary
Ordinary
10
Annuities
Annuities
LO-6
The payment
payment interval
interval
The
differs from
from
differs
the compounding
compounding interval
interval
the
McGraw-Hill Ryerson
Usingcalculators
calculators
Using
10-51
Ordinary
Ordinary
10
Annuities
Annuities
Forthose
thosewho
whoare
areusing
using
For
thistype
typeof
ofcalculator,
calculator,
this
theC/Y
C/Y
the
See
following
REVIEW
worksheet
worksheet
willnow
nowbe
beused
used
will
Forthose
thosewho
whoare
areusing
usingaa
For
non-financialcalculator,
calculator,
non-financial
newformulae
formulae
new
willbe
beadded
addedtotofind
find
will
thesolution
solution
the
McGraw-Hill Ryerson
See
following
Ordinary
Ordinary
10-52
10
Annuities
Annuities
10-53
Ordinary
Ordinary
10
Annuities
Annuities
The12
12
The
isisaa
default
default
setting
setting
Appears
Appears
automatically
automatically
new ones!
Example
Example
10-54
Ordinary
Ordinary
10
Annuities
Annuities
Typical
Typical
Canadian
Canadian
mortgage
mortgage
Interest isis
Interest
compounded
compounded
semi-annually
semi-annually
P/Y ==
C/Y
Using
12.00
12.00
2.00
12
2
and
and
payments are
are
payments
each month.
month.
each
10-55
Ordinary
Ordinary
10
Annuities
Annuities
Step11
Step
C
=
Step 2
Step 2
AddingNew
NewFormulae
Formulae
Adding
Determine the number of Interest
c
ompounding interval
number of interest compoundings per year
periods per
number of payments
Use
per year
c to determine i2
Ordinary
Ordinary
10
Step11
Step
Annuities
Annuities
Typical
Typical
Canadian
Canadian
mortgage
mortgage
6% Interest
Interest isis
6%
compounded
compounded
semi-annually
semi-annually
and
and
payments are
are
payments
each month.
month.
each
Find C
C and
and ii2..
Find
2
McGraw-Hill Ryerson
10-56
0.166666 = C
12
Step 22 Use
Step
c to determine i
10-57
Ordinary
Ordinary
Step 22 Use
Step
10
Annuities
Annuities
6% Interest
Interest isis
6%
compounded
compounded
semi-annually
semi-annually
McGraw-Hill Ryerson
i2 = (1+i)c - 1
i2 = (1+ .06/2)
Typical
Typical
Canadian
Canadian
mortgage
mortgage
and
and
payments are
are
payments
each month.
month.
each
Find C
C and
and ii2..
Find
c to determine i
.16666
-1
0.166666
0.0049 = 2
1.0049
1.03
1
another
anotherexample
example
10-58
Ordinary
Ordinary
10
Annuities
Annuities
Mortgage
Mortgage
5% interest
interest
5%
isis
compounded
compounded
monthly
monthly
and
and
payments
payments
are each
each
are
week
week
McGraw-Hill Ryerson
Step11
Step
To determine the number of
c
ompoundings
number of interest compoundings per year
number of payments per year
C=
0.23076 = C
12
52
Step 22 Use
Step
c to determine i
10-59
Ordinary
Ordinary
10
Annuities
Annuities
Step 22 Use
Step
i2 = (1+i)c - 1
i2 = (1+ .05/12)
Mortgage
Mortgage
5% interest
interest
5%
isis
compounded
compounded
monthly
monthly
and
and
payments
payments
are each
each
are
week
week
McGraw-Hill Ryerson
c to determine i
.2308
-1
1.0041667
0.0041667
0.230769
0.00096 = i2
1.00096
0.05
12
1
another
anotherexample
example
10-60
Ordinary
Ordinary
Is the following a
10
General Annuity?
Annuities
Annuities
Criteria
Criteria
The payment
payment interval
interval
The
differs from
from
differs
the compounding
compounding interval
interval
the
As the
the Criteria
Criteria have
have been
been met,
met, therefore,
therefore,
As
we need
need to
to determine
determine C
C
we
McGraw-Hill Ryerson
Ordinary
Ordinary
10
Step11 Find
Step
10-61
Annuities
Annuities
0.1666
0.00575
1.00575
You decide to
save $50/month
12
2
for the next
three years.
Step 22 Find i2
Step
If you
invest all of
these savings in
an account
which will pay
1.035
you 7%
compounded
semi-annually,
1
determine the
total in the
account after
3 years.
McGraw-Hill Ryerson
i2 = (1+i) - 1
i2 = (1+ .07/2).1666-1
i2 = 0.00575
c
Step33 Use
Step
i2
Ordinary
Ordinary
10
Step33 Use
Step
Annuities
Annuities
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.
McGraw-Hill Ryerson
Formula FV = PMT
Formula
PMT = 50
i = .07/2
(1+ i)n - 1
i
PV = 0 n = 3*12 = 36
c = 2/12 = .16666 i2 = 0.00575
1.229255
0.229255
0.00575
1993.51
39.8702
1.00575
1
10-62
36
1
50
Solve
10-63
Ordinary
Ordinary
10
Annuities
Annuities
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.
McGraw-Hill Ryerson
P/Y=== 1993.51
C/Y
FV
12
1220
12
50
2
36
0
10-64
Ordinary
Ordinary
10
Annuities
Annuities
SAVE c in memory
Improving
the
Accuracy
of
Calculated
Results
McGraw-Hill Ryerson
it later!
Ordinary
Ordinary
10
Annuities
Annuities
McGraw-Hill Ryerson
10-65
10-66
Ordinary
Ordinary
10
Annuities
Annuities
$1000
$1000
$1000
14 Years
$1000
FV22
FV
McGraw-Hill Ryerson
10-67
Ordinary
Ordinary
10
Annuities
Annuities
ReidDavid
David
Reid
madeannual
annual
made
depositsof
of$1,000
$1,000toto
deposits
FleetBank,
Bank,
Fleet
thatpays
pays
that
6%
6%
interest
interest
compounded
compounded
annually.
annually.
After44years,
years,Reid
Reid
After
makesno
nomore
more
makes
deposits.
deposits.
Whatwill
willbe
bethe
the
What
balancein
inthe
the
balance
account
account
McGraw-Hill Ryerson
valueat
at
value
endof
of
end
years
44years
C/Y
P/Y
1.00
1.000
FV=== 4374.62
1
6
1
1000
0
4
Step2
2
Step
10-68
Ordinary
Ordinary
10
Annuities
Annuities
ReidDavid
David
Reid
madeannual
annual
made
depositsof
of$1,000
$1,000toto
deposits
FleetBank,
Bank,
Fleet
thatpays
pays
that
6%
6%
interest
interest
compounded
compounded
annually.
annually.
After44years,
years,Reid
Reid
After
makesno
nomore
more
makes
deposits.
deposits.
Whatwill
willbe
bethe
the
What
balancein
inthe
the
balance
account
account
McGraw-Hill Ryerson
FV ==
7834.27
4374.62
value14
14years
years
value
fromnow
now
from
0
10
Formula solution
solution
Formula
10-69
Ordinary
Ordinary
10
Annuities
Annuities
ReidDavid
David
Reid
madeannual
annual
made
depositsof
of$1,000
$1,000toto
deposits
FleetBank,
Bank,
Fleet
thatpays
pays
that
6%
6%
interest
interest
compounded
compounded
annually.
annually.
After44years,
years,Reid
Reid
After
makesno
nomore
more
makes
deposits.
deposits.
Whatwill
willbe
bethe
the
What
balancein
inthe
the
balance
account
account
McGraw-Hill Ryerson
n
(1+
i)
-1
Formula
Formula FV = PMT
i
PMT = 1000 n = 4 i = 0.06 c = 1
0.262477
1.262477
4374.62
valueat
atend
end
value
of44years
years
of
1.06
1
0.06
1000
Step2
2
Step
10-70
Ordinary
Ordinary
10
Annuities
Annuities
McGraw-Hill Ryerson
n
Formula
FV
=
PV(1
+
i)
Formula
PV =4374.62 n = 10 i = 0.06
10.262477
1.262477
.1708477
4374.62
7834.27
1.06
10
value14
14years
years
value
fromnow
now
from
10-71
Ordinary
Ordinary
10
Annuities
Annuities
How
much more
interest will
Reid David
accumulate
over the 14
years if his
account earns
6%
compounded
daily?
McGraw-Hill Ryerson
365
P/Y
C/Y
C/Y
FV === 4386.52
365
10
valueat
atend
end
value
of44years
years
of
1000
10-72
Ordinary
Ordinary
10
Annuities
Annuities
How
much more
interest will
Reid David
accumulate
over the 14
years if his
account earns
6%
compounded
daily?
McGraw-Hill Ryerson
P/Y
FV
FV=== 4386.52
7992.37
365
10
365
3650
value14
14years
years
value
fromnow
now
from
10-73
Ordinary
Ordinary
10
Annuities
Annuities
Interest
Interest
$7,992.37
McGraw-Hill Ryerson
$7,834.27
Ordinary
Ordinary
10-74
10
Annuities
Annuities
McGraw-Hill Ryerson