Annuities and Financial Mathematics
An annuity is a series of equal payments made at regular intervals. Understanding annuities helps with loans, superannuation, and savings plans.
What You Need to Know
Key Concept Diagram
An annuity involves regular equal payments over a fixed period
Future value of annuity: FV = PMT x [(1+r)^n - 1] / r
Present value of annuity: PV = PMT x [1 - (1+r)^-n] / r
Interest compounds each period before the next payment is added
Key Vocabulary
Annuity
A series of equal payments at regular time intervals
Future value
The total value of an investment at a future date including interest
Present value
The current worth of a future stream of payments
Compound interest
Interest calculated on both principal and accumulated interest
Knowledge Check
Select the correct answer for each question. Click "Check Answer" to see if you are right.
Question 1
$200 is deposited monthly for 12 months at 6% p.a. (0.5% per month). Which formula gives the future value?
Question 2
Which best describes an annuity?
Question 3
If the interest rate per period increases, the future value of an annuity will:
Key Concepts Summary
- ●An annuity involves regular equal payments over a fixed period
- ●Future value of annuity: FV = PMT x [(1+r)^n - 1] / r
- ●Present value of annuity: PV = PMT x [1 - (1+r)^-n] / r
- ●Interest compounds each period before the next payment is added