- Two Types of Annuities
- Calculating the Future Value of an Ordinary Annuity
- Calculating the Present Value of an Ordinary Annuity
- Calculating the Future Value of an Annuity Due
- Calculating the Present Value of an Annuity Due
Utmost of us have had the experience of making a series of fixed payments over some time — similar to rent or auto payments or entering a series of payments for some time, similar to interest from a bond or instrument of deposit (CD). These recreating or ongoing payments are technically appertained to as” Annuities” (not to be confused with the fiscal product called a subvention, though the two are related). There are several ways to measure the cost of making similar payments or what they are eventually worth. Then is what you need to know about calculating the present value (PV) or Future value (FV) of a subvention.
- Intermittent payments, similar to the rent on an apartment or interest on a bond, are occasionally appertained to as” Annuities.”
- In ordinary Annuities, payments are made at the end of each period. With Annuities due, they are made on the morning of the period.
- The Future value of a subvention is the total value of payments at a specific point in time.
- The present value is how important money would be needed now to produce those future payments.
Two Types of Annuities
Annuities, in this sense of the word, break down into two introductory types ordinary Annuities and Annuities due.
- Ordinary Annuities An ordinary subvention makes (or requires) payments at the end of each period. For illustration, bonds generally pay interest at the end of every six months.
- Annuities due with a subvention due, by the discrepancy, payments come on the morning of each period. Rent, which landlords generally bear on the morning of each month, is a common illustration. You can calculate the present or future value for an ordinary subvention or a subvention due using the following formulas.
Calculating the Future Value of an Ordinary Annuity
Future value (FV) is a measure by the series of regular payments where it will be worth-able at some point in the future interest rate. So, for illustration, if you plan to invest a certain amount each month or time, it’ll tell you how important you will have accumulated as of a Future date. However, the Future value is useful in determining the total cost of the loan, If you’re making regular payments on a loan. Because of the time value of money — the conception that any given sum is worth further now than it’ll be in the future because it can be invested in the meantime, the first $ 1,000 payment is worth further than the alternate, and so on. So, let’s assume that you invest $1,000 every time for the coming five times, at 5 interest. Below is how important you would have at the end of the five-time period.
Calculating the Present Value of an Ordinary Annuity
In discrepancy to the Future value computation, a present value (PV) computation tells you how important money would be needed now to produce a series of payments in the future, again assuming a set interest rate. Using the same illustration of five $ 1,000 payments made five times, then’s how a present value computation would look. It shows that $4,329.58, invested at 5% interest, would be sufficient to produce those $ 1,000 payments.
Calculating the Future Value of an Annuity Due
A subvention due, you may recall, differs from an ordinary subvention in that the subvention due’s payments are made in the morning, rather than at the end, of each period.
Calculating the Present Value of an Annuity Due
Also, the formula for calculating the present value of a subvention due considers the fact that payments are made in the morning rather than at the end of each period. For illustration, you could use this formula to calculate the present value of your Future rent payments as specified in your parcel. Below, we can see what the coming five months would bring you, in terms of present value, assuming you kept your money in an account earning 5% interest.
The formulas described make it possible and fairly easy if you do not mind the calculation — to determine the present or Future value of either an ordinary subvention or a subvention due. Financial calculators (you can find them online) also can calculate these for you with the correct inputs.