Ordinary

Ordinary 10-1
10
Annuities
Annuities
O
Ordinary A nnuities

Chapter 10
McGraw-Hill
McGraw-HillRyerson
Ryerson
 Ordinary
Ordinary 10-2
10
Annuities
Learning Objectives
Annuities

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

LO-3 fair market value of a cash flow stream

that includes an annuity
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-3
10
Annuities
Learning Objectives
Annuities
Calculate the

LO-4 principalbalance owed on a loan

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
Ordinary 10-4
10 Terminology
Annuities
Annuities

LO-1 Annuity
- A series of equal payments at regular
intervals

Term of the Annuity

- 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
Ordinary 10-5
10 Terminology
Annuities
Annuities

PMT is the amount of each payment in an annuity

PMT
n is the number of payments in the annuity

payment interval is the time between

successive payments in an annuity

ordinary annuities are ones in which payments

are made
at the end of each payment
interval
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-6
10 Terminology
Annuities
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
Ordinary 10-7
10 Terminology
Annuities
Annuities

for an n-payment Ordinary Annuity

Payment interval
Interval
0 1 2 3 n-1 n
number
PMT PMT PMT PMT PMT

Term of the annuity

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-8
10
Annuities
Annuities
Ordinary Annuity
Ordinary
Ordinary Ordinary
Ordinary
SSimple Annuities
impleA nnuities General
G eneralAAnnuities
nnuities

The payment
The payment interval
interval The payment
The payment interval
interval

== differs from
differs from
the compounding
the compounding the compounding
the compounding interval
interval
interval
interval
Monthly payments, Monthly payments,
and interest is but interest is
compounded monthly compounded semi-annually
McGraw-Hill Ryerson
 Ordinary
Ordinary FutureValue
Value 10-9
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
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
Ordinary FutureValue
Value 10-10
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
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
Ordinary FutureValue
Value 10-11
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
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
Ordinary FutureValue
Value 10-12
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
Annuity

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 FutureValue
Value 10-13
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
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
Note
Keys direction 3 36 0
12
500

Using the
Using the formula
formula
McGraw-Hill Ryerson
 Ordinary
Ordinary FutureValue
Value 10-14
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
Annuity

the sum of the future values of all the payments

Formula
Formula FV = PMT [ (1+ i)n - 1
i
]

McGraw-Hill Ryerson
 Ordinary
Ordinary FutureValue
Value 10-15
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
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) - 1
i
n
[ ] 18810.28
37.6206
1.0025
0.0941
0.0025
1.0941

.03 12

1 36

1
500
McGraw-Hill Ryerson
 Ordinary
Ordinary Solvingearlier
earlierQuestion
Question 10-16
Solving
10 usingAnnuities
using Annuities
Annuities
Annuities

You vow to save $500/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.

Since your account was empty when you began

PV = 0
n = 4 payments
PMT = -500

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-17
10
Annuities
Annuities

CashFlows
Cash Flows
..a term
..a term that
that refers
refers to
to payments
payments
that can
that can be
be either
either

payments received payments made

e.g. receipts e.g. cheques
Treated as:
Treated as:
Positives
Positives Negatives
Negatives --
++ Therefore
Therefore
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-18
10 Cash Flow Sign Convention
Annuities
Annuities

Therefore
Therefore

when you are making payments,

Really
Really
or even making deposits to
payments to
payments to
savings,
these are cash outflows, the bank!
the bank!
and therefore
the values must be negative!

Using the
McGraw-Hill Ryerson
 Ordinary
Ordinary FutureValue
Value 10-19
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
Annuity
PV = 0 n = 4 payments PMT -500
3

Youvow
You vowto
tosave
save 0
$500/monthfor
$500/month forthe
the 12
next four months, FV = 2007.51
next four months, 500
with your first
with your first
depositone
deposit onemonth
month
fromtoday.
from today.
If your 4
If your
savingscan
savings canearn
earn We already
already have
have
3%converted
converted We
3% these from
these from before,
before, so
so
monthly,determine
monthly, determine we dont have to enter
thetotal
the totalin your we dont
inyour have to enter
them again!
again!
account four them
account four
monthsfrom
months fromnow.
now.
McGraw-Hill Ryerson
Formula solution
Formula solution
 Ordinary
Ordinary 10-20
10 Youvow
You vowtotosave
save$500/month
$500/monthfor forthe
thenext
next
fourmonths,
four months,with
withyour
yourfirst
firstdeposit
deposit
Annuities
Annuities onemonth
monthfrom
fromtoday.
today.IfIfyour
yoursavings
savingscan
can
one
earn3%
earn 3% converted
convertedmonthly,
monthly,determine
determinethe the
totalin
total inyour
youraccount
accountfour
fourmonths
monthsfromfromnow.
now.
Formula
Formula FV = PMT [ (1+ i)
i
n
]
-1
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
Ordinary 10-21
10 Not seeing the total picture!
Annuities
Annuities

When you use formula or a

calculators financial functions to
calculate an annuitys
Future Value,
the amount
each payment
contributes to the future value
is
NOT apparent!

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-22
10 FV Contributions
Contribution
10%Compounded
CompoundedAnnually
Annually
FV $
Annuities
Annuities 10% FV
$10.00 14.64

$10.00 13.31

$10.00
$10.00 12.10

$10.0 11.00
0
10.00

0 1 2 3 4 5 $61.05
$61.05
Years
Years
McGraw-Hill Ryerson
 Ordinary
Ordinary FutureValue
Value 10-23
Future
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
Annuity

You decide to save $75/month for the next four years.

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
Ordinary 10-24
10
Annuities
Annuities

P/Y==
FV 4140.69
12
Youdecide
You decideto tosave
save
$75/monthfor
$75/month forthethe
nextfour
next fouryears.
years. 7 48
IfIfyou
youinvest
invest
allof
all ofthese
thesesavings
savings 0 75
inananaccount
accountwhichwhich 12
in
willpay
will payyou you7%7%
compounded
compounded
monthly,determine:
monthly, determine: FV.. $4,140.69
a)the
a) thetotal
totalin
inthe
the Deposits... 3,600.00
accountafter
account after44years
years
b)the
theamount
amountyou you Interest Earned = $ 540.69
b)
deposited
deposited
c)c)the
theamount
amount
Formulasolution
solution
ofinterest
of interestearned
McGraw-Hill Ryersonearned Formula
 Ordinary
Ordinary 10-25
10
Annuities
Annuities
Formula FV = PMT
Formula [ (1+ i)n - 1
i ]
1.005833
0.005833
55.20924
0.32205
1.32205
4140.6927
Youdecide
You decideto tosave
save
$75/monthfor
$75/month forthethe
nextfour
next fouryears.
years. .07 12
IfIfyou
youinvest
invest
allof
all ofthese
thesesavings
savings 1 48
inan
in anaccount
accountwhichwhich
willpay
will payyou you7%7% 1
compounded
compounded
monthly,determine:
monthly, determine:
a)the
thetotal
totalin
inthe
the 75
a)
accountafter
account after44years
years
b)the
b) theamount
amountyou you FV $4,140.69 - Deposits 3,600.00
deposited
deposited = Interest Earned $540.69
c)c)the
theamount
amount
ofinterest
of interestearned
McGraw-Hill Ryerson
earned
 Ordinary
Ordinary PresentValue 10-26
PresentValue
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
Annuity

the sum of the present values of all the payments

Formula
Formula PV = PMT [ 1-(1+ i)-n
i
]

McGraw-Hill Ryerson
 Ordinary
Ordinary PresentValue
Value 10-27
Present
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
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

n=4
$1000 (1.04) -4

Sum = PV of annuity the sum of the present values of all the

payments
McGraw-Hill Ryerson
 Ordinary
Ordinary PresentValue
Value 10-28
Present
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
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
$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
Ordinary PresentValue
Value 10-29
Present
10 ofofan
an
Annuities
Annuities OrdinarySimple
Ordinary SimpleAnnuity
Annuity

You overhear your friend saying the he is repaying a

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
Since you are
are making
making payments,
payments, not
not receiving
receiving them, PMT == -450
them, PMT 450
n = 9 payments Repaid 9 payments at $450 = $4,050

Interest use 12
Interest -- use not .12
12,, not .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

 Ordinary
Ordinary 10-30
10
Annuities
Annuities

PV = 3,918.24
Youoverhear
You overhearyouryour
friendsaying
sayingthethe 12
friend 8 9 0
heisisrepaying
he repayingaa
loanat
loan at$450
$450every
every 450
monthfor
month forthe
thenext
next
ninemonths.
nine months.
Theinterest
The interestrate
ratehehe
hasbeen
has beencharged
chargedisis Amount Borrowed (PV) $ 3,918.24
8%compounded
8% compounded Repaid.. 4,050.00
monthly. Calculate
monthly. Calculate
theamount
the amountof ofthe
the Interest Paid = $ 131.76
loan,and
loan, andthe
the
amountof
amount ofinterest
interest
involved.
involved. Formula solution
Formula solution
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-31
10 Formula
Formula PV = PMT [ 1-(1+ i)-n
i
]
Annuities
Annuities

-0.0580479
1.006667
0.006667
3,918.24
0.94195
Youoverhear
You overhearyouryour
friendsaying
friend sayingthethe .08 12
heisisrepaying
he repayingaa
loanat
loan at$450
$450every
every 1 9
monthfor
month forthe
thenext
next
ninemonths.
nine months.
Theinterest
interestrate
ratehehe 1
The
hasbeen
has beencharged
chargedisis
8%compounded
compounded 450
8%
monthly. Calculate
monthly. Calculate
theamount
the amountof ofthe
the Repaid $4,050.00 - Borrowed $3,918.24
loan,and
loan, andthe
the
amountof
amount ofinterest
interest = Interest Charged $131.76
involved.
involved.
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-32
10
Annuities
Annuities

Contribution of
Each Payment
to an
Annuitys
Present Value
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-33
10 PV Contributions
PV
PV Contribution
Annuities
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
$37.91
McGraw-Hill Ryerson
Years
Years
 Ordinary
Ordinary 10-34
10
Annuities
Annuities

LO-3

of a cash flow stream that includes an annuity

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-35
10 You have received two offers on a
Annuities
Annuities building lot that you want to sell.
LO-3 Ms. Armstrongs 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
Ordinary 10-36
10 On what
On what information
information
Annuities
Annuities
should
should ocuwe
we
ocus?
ffocus?
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.)

Back to
Back to Offer
OfferComparison
Comparison
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-37
10 You have received two offers on a building lot that
you want to sell. Ms. Armstrongs offer is $25,000
Annuities
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.

Ms. Armstrong Mr. Belcher

$25,000 down
$20,000 down
plus a $100,000 lump
sum payment plus $5000 every quarter
five for five years
years from now
Focal Date:
Focal Date: Today
Today

McGraw-Hill Ryerson
Preparing Time Lines
 Ordinary
Ordinary Time Lines 10-38
10
AA $25,000 down plus a $100,000 lump sum payment
Annuities
Annuities five years from now
BB $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
Ordinary 10-39
10
Annuities
Annuities
Step 1Determine todays value of Ms. Armstrongs offer
You have received
two offers on a todays
todays
todays
todays value
value
building lot that you PV= 103,352.62
78352.692 ofMs.
of Ms.
value
value As
As of
of
want to sell. Ms. lump
lump sum
total
sum offer
Armstrongs 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
Step2
Step 2
 Ordinary
Ordinary 10-40
10
Annuities
Annuities
Step 2 Determine todays value of Mr. Belchers offer.
You have received todays
todays value
value
todays
todays
two offers on a of Mr.Bs
value
ofvalue
Mr. Bs
of
building lot that you
P/Y
C/Y
PV == 79,376.93
99,376.93
410 of
lumpsum
lump total
sum
total
want to sell. Ms. offer
Armstrongs offer is offer
$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
Ordinary 10-41
10
Annuities
Annuities
Total Value

of each offer
Ms. Armstrong $103,352.62
Mr.Belcher 99,376.93
Difference in Offers $ 3,975.69

Better off accepting Ms. Armstrongs offer!

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-42
Calculating the
10
Annuities
Annuities Original
LO-4 Loan
and a
The required monthly payment on
aSubsequent
five-year loan,Balance
bearing 8% interest,
compounded monthly, is $249.10.
a) What
a) What was was the
the original
original principal
principal amount
amount of of the
the loan?
loan?
b) What
b) What isis the
the balance
balance owed
owed just
just after
after the
the twentieth
twentieth payment?
payment?

Since you
Since you areare borrowing
borrowing money,
money,you
you are
are looking
looking for
for PV
PV
andand FV
FV == 00 once
once you
you have
have repaid
repaid the
the loan!
loan!
nn == 55 yrs
yrs ** 12
12 payments
payments perperyear 60 payments
year == 60 payments

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-43
10 Original Principal = PV of all 60 payments
Annuities
Annuities PMT = 249.10 FV = 0 n = 5*12 = 60 i = .08/12 c= 1

The required
The required
monthly payment
monthly payment
PV = 12,285.220 Originalloan
Original loan
on aa five-year
on five-yearloan,
loan, value
bearing 8%
bearing 8% interest,
interest, value
compounded
compounded
monthly, isis $249.10.
monthly, $249.10. 0 8
a) What
a) What was was the
the
original principal
original principal 12
amount of of the
the loan?
loan? 249.10
amount
b) What
b) What isis the
the
balance owed
owed justjust 60
balance
afterthe
after the twentieth
twentieth
payment?
payment?
McGraw-Hill Ryerson
 10-44
Ordinary
Ordinary Balance after 20 payments
10 = PV
Annuities
Annuities of 40
PMT = 249.10 FV payments
= 0 n = 60left
- 20 = 40 i = .08

The required
The required
monthly payment
monthly payment Newloan
loan
on aa five-year
on five-yearloan,
loan, PV = 8,720.75 New
bearing 8% 8% interest,
interest, balance
balance
bearing
compounded
compounded
monthly, isis $249.10.
monthly, $249.10.
a) What
a) What was was the
the
original principal
original principal 40
amount of
amount of the
the loan?
loan?
b) What
b) What isis the
the
balance owed
balance owed justjust We will
We will leave
leave itit to
to you
you to
to do
do
afterthe
after the twentieth
twentieth
payment? the algebraic
the algebraic solution!
solution!
payment?
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-45
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
 Ordinary
Ordinary 10-46
10 Deferred Annuities
Annuities
Annuities

d = Number of payment intervals

Deferred in the period of deferral
AADeferred
Annuity
Annuity Two-step procedure
Two-step procedure to
to find
find PV:
PV:
maybe
may beviewed
viewedas
as
an Calculate the present value, PV1,
an
ordinaryannuity
annuity of the payments at the end of the
ordinary
thatdoes
doesnot
notbegin
begin period of deferral this is just the
that
untilaatime
until time PV of an ordinary annuity
interval
interval Calculate the present value,
(namedthe
(named theperiod
period
PV2, of the STEP 1 amount
ofofdeferral)
deferral)
haspassed
has passed at the beginning of the period
McGraw-Hill Ryerson
of deferral
 Ordinary
Ordinary 10-47
10
Annuities
Annuities

your
yourfriend
friendsaying
sayingthe
thehe
heisisrepaying
repayingaaloan
loanat
at$450
$450every
every
monthfor
month forfour
fourmonths.
months. The
Theinterest
interestrate
ratehe
hehas
hasbeen
beencharged
chargedisis
8%compounded
8% compoundedmonthly.
monthly. Calculate
Calculatethetheamount
amountofofthe
theloan,
loan,and
and
theamount
the amountofofinterest
interestinvolved.
involved.

thissame
this samefriend
frienddoesnt
doesntbegin
begintotorepay
repayhis
hisloan
loan
foranother
for another11
11months,
months,atataarate
rate$500
$500every
every
month
month forfour
for fourmonths.
months. The
Theinterest
interest
rateisisstill
rate still8%
8% compoundedmonthly.
compounded monthly.
Determinethe
Determine sizeof
thesize ofthetheloan
loan. .
McGraw-Hill Ryerson Solve
 Ordinary
Ordinary PresentValue
Value 10-48
Present
10 ofofaa
Annuities
Annuities DeferredAnnuity
Deferred Annuity
Step 1 Determine PV of Annuity 10 months from now

0 10 11 12 13 14 Months
$500 $500 $500 $500

PVof the Annuity

PV

Step 22 -- Discount
Step Discount for
for10
10 months
months to
to get
get todays
todaysLoan
LoanValue
Value
Hint: (Use Compound Discount)

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-49
10
Annuities
Annuities

thissame
this samefriend
friend
doesntbegin
begintoto PV =
PV
FV - 1967.11
1840.65 loan
value
loan value
10 months
value
doesnt value
today 10 months
repayhishisloan
loan todayfromnow
from now
repay
for
for
another11
another 11months,
months, 0 8
atataarate
rate$500
$500
500 4
everymonth
every month 12
forfour
for four
months. The
months. The
interestrate
rateisisstill
still 0
interest
8%
8% 10
compounded
compounded
monthly.
monthly.
Determinethe
Determine thesize
McGraw-Hill Ryerson size
 Ordinary
Ordinary 10-50
10
Annuities
Annuities

LO-6 The payment

The payment interval
interval
differs from
differs from
the compounding
the compounding interval
interval

e.g. A typical Canadian mortgage has

Monthly payments,
but the interest is
compounded semi-annually

Using calculators
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-51
10
Annuities
Annuities

Forthose
For thosewho
whoare
areusing
using See
thistype
this typeof
ofcalculator,
calculator, following
the C/Y
theC/Y REVIEW
worksheet
worksheet
willnow
will nowbe
beused
used
Forthose
For thosewho
whoare
areusing
usingaa
non-financialcalculator,
non-financial calculator, See
newformulae
new formulae following
willbe
will beadded
addedtotofind
find
thesolution
the solution

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-52
10
Annuities
Annuities

We can input the number of

compoundings per year into the
financial calculator.
This can be performed by using
the symbol
To access this symbol use:

and you will see

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-53
10
The12
The 12
Annuities
Annuities isisaa
default
default
setting
setting
This display is referred to as the worksheet.
represents the number of Payments per Year
represents the number of Compoundings per Year
To access use:

Appears
Appears
automatically
automatically

Note: You can override these values by entering new ones!

McGraw-Hill Ryerson
Example
Example
 Ordinary
Ordinary 10-54
10
Annuities
Annuities

Typical
Typical P/Y ==
C/Y 12.00
12.00
2.00
Canadian
Canadian Using 12
mortgage
mortgage
Interest isis
Interest
compounded
compounded
semi-annually
semi-annually 2
and
and
payments are
payments are
each month.
each month.
Adding New Formulae
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-55
10
Annuities
Annuities AddingNew
Adding NewFormulae
Formulae
Step11
Step Determine the number of Interest
c
periods perompounding interval
number of interest compoundings per year
number of payments per year
C =
Step 2
Step 2 Use c to determine i2
Use i2 = (1+i)c - 1 to calculate the equivalent
periodic rate that matches the payment interval
Step33
Step Use this equivalent periodic rate as the
value for i
in the appropriate simple annuity
formula Example
Example
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-56
10 Step11
Step To determine the number of Interest
Annuities
Annuities c
periods per ompounding interval
number of interest compoundings per year
C= number of payments per year
Typical
Typical
Canadian
Canadian
mortgage
mortgage
6% Interest
6% Interest isis 0.166666 = C
compounded
compounded
semi-annually
semi-annually
and
and
2 12
payments are
payments are
each month.
each month.
Find C
Find and ii2..
C and 2
Step 22 Use
Step c to determine i2
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-57
10
Annuities
Step 22 Use
Step c to determine i 2
Annuities

i2 = (1+i)c - 1
Typical
Typical
Canadian
Canadian i2 = (1+ .06/2) .16666
-1
mortgage
mortgage
6% Interest
6% Interest isis
compounded
compounded 0.0049 = 2
1.0049
0.166666 i
semi-annually
semi-annually

and
and 1.03
payments are
payments are 1
each month.
each month.
Find C
Find and ii2..
C and 2
McGraw-Hill Ryerson
another
anotherexample
example
 Ordinary
Ordinary 10-58
10
Annuities
Annuities
Step11
Step To determine the number of
c ompoundings
number of interest compoundings per year
Mortgage
Mortgage C= number of payments per year

5% interest
5% interest
isis 0.23076 = C
compounded
compounded
monthly
monthly
12 52
and
and
payments
payments
are each
each
are
week
Step 22 Use
Step c to determine i2
week
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-59
10
Annuities
Step 22 Use
Step c to determine i 2
Annuities

i2 = (1+i)c - 1
Mortgage
Mortgage i2 = (1+ .05/12) .2308
-1
5% interest
5% interest
isis
compounded 0.00096 = i2
1.0041667
0.230769
1.00096
0.0041667
compounded
monthly
monthly 0.05 12 1
and
and
payments
payments
are each
are each 1
week
week
McGraw-Hill Ryerson
another
anotherexample
example
 Ordinary
Ordinary 10-60
10 Is the following a
Annuities
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
Criteria
The payment
The payment interval
interval
differs from
differs from
the compounding
the compounding interval
interval

As the Criteria have been met, therefore,

we need to determine C
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-61
10 Step11 Find
Step c
Annuities
Annuities

0.00575
0.1666
1.00575
You decide to
save $50/month 2 12
for the next
three years. Step 22 Find i2
Step
i2 = (1+i) - 1
c
If you
invest all of i2 = (1+ .07/2).1666-1
these savings in
an account i2 = 0.00575
which will pay
you 7% 1.035
compounded
semi-annually, 1
determine the
total in the
account after Step33 Use
Step i2
3 years.
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-62
Step33 Use
Step i2 in the appropriate formula
10
Annuities
Annuities Formula FV = PMT
Formula [ (1+ i)n - 1
i ]
PMT = 50 PV = 0 n = 3*12 = 36
You decide to c = 2/12 = .16666 i2 = 0.00575
save $50/month i = .07/2
for the next
three years.
If you 1.229255
0.229255
0.00575
1993.51
39.8702
1.00575
invest all of
these savings in
an account 1 36
which will pay
you 7% 1
compounded
semi-annually,
determine the 50
total in the
account after
3 years.
McGraw-Hill Ryerson Solve
 Ordinary
Ordinary 10-63
10
Annuities
Annuities

You decide to
save $50/month
for the next P/Y=== 1993.51
C/Y
FV 12
1220
three years. 12
If you invest
all of these 50 36
savings 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
Ordinary 10-64
10
number of interest compoundings per year
Annuities
Annuities number of payments per year
C=
the value for c can be a repeating decimal
SAVE c in memory

your calculator retains at least

Improving
two more digits than you see displayed!
the
Accuracy
of when you need the exponent for
Calculated Simply the c value from memory!
Results
The value for i2 should be saved in
memory as soon you calculate it! it later!

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-65
10
Annuities
Annuities

Reid David made annual deposits of $1,000

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
Ordinary 10-66
10 Reid David made annual deposits of $1,000 to
Annuities
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

FV11 of the Annuity

FV
Step 2 Determine FV using compound interest
FV22
FV
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-67
10
Annuities
Annuities
Step 1 Determine FV1 of Annuity 10 years from now

ReidDavid
Reid David valueat
value at
madeannual
made annual endof
end of
depositsof
deposits of$1,000
$1,000toto C/Y
P/Y
FV=== 4374.62
1.00
1.000
FleetBank,
Fleet Bank, 44years
years
thatpays
that pays 1
6%
6% 6 0
interest
interest
compounded
compounded 1000 4
1
annually.
annually.
After44years,
After years,Reid
Reid
makesno
makes nomore
more
deposits.
deposits.
Whatwill
What willbe
bethe
the
balancein
balance inthe
the Step2
Step 2
account
account
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-68
10
Annuities
Annuities
Step 2 Determine FV2 using compound interest

ReidDavid
Reid David value14
14years
years
madeannual
annual value
made FV == 7834.27
4374.62 fromnow
now
depositsof
deposits of$1,000
$1,000toto from
FleetBank,
Fleet Bank,
thatpays
that pays
6%
6% 0
interest
interest
10
compounded
compounded
annually.
annually.
After44years,
After years,Reid
Reid
makesno
makes nomore
more
deposits.
deposits.
Whatwill
What willbe
bethe
the
balancein
balance inthe
the
account Formula solution
Formula solution
account
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-69
10 Step 1 Determine FV of Annuity 4 years from now
Annuities
Annuities
(1+
[
i) -1
]
n
Formula
Formula FV = PMT
i
ReidDavid
Reid David PMT = 1000 n = 4 i = 0.06 c = 1
madeannual
made annual
depositsof
deposits of$1,000
$1,000toto
FleetBank,
Fleet Bank, valueatatend
end
thatpays
that pays value
6% 0.262477
1.262477
4374.62 of44years
years
6% of
interest
interest
compounded
1.06 4
compounded
annually.
annually.
1 0.06
After44years,
After years,Reid
Reid
makesno
makes nomore
more
deposits.
deposits. 1000
Whatwill
What willbe
bethe
the
balancein
balance inthe
the Step2
Step 2
account
account
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-70
10 Step 2 Determine FV using compound interest
Annuities
Annuities
Formula
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 value14
value 14years
years
6% 10.262477
1.262477
.1708477
4374.62
7834.27 fromnow
from now
interest
compounded 1.06 10
annually.
After 4 years, Reid
makes no more
deposits.
What will be the
balance in the account
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-71
10
Annuities
Annuities
Step 1 Determine FV of Annuity 4 years from now

valueat
value atend
end
P/Y
C/Y
C/Y 10
FV === 4386.52
365 of44years
years
of
How 1
much more
interest will 1000 4
Reid David
accumulate 365 6 0
over the 14
years if his
account earns
6%
compounded
daily?
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-72
10
Annuities
Annuities
Step 2 Determine FV in 10 years
using compound interest

value14
value 14years
years
P/Y
FV
FV=== 4386.52
7992.37
36510 fromnow
from now
How
much more
interest will
Reid David 0 3650
accumulate 365
over the 14
years if his
account earns
6%
compounded
daily?
McGraw-Hill Ryerson
 Ordinary
Ordinary 10-73
10
Annuities
Annuities

Interest
Interest

$7,992.37 $7,834.27

McGraw-Hill Ryerson
 Ordinary
Ordinary 10-74
10
Annuities
Annuities

This completes Chapter 10

McGraw-Hill Ryerson