Learning Unit 9b:

Mathematics Finance
Learning Unit 9b:
Annuity
 Annuity

A series of consecutive payments or receipts of

equal amount
 WHAT IS THE DIFFERENCE BETWEEN AN
ORDINARY ANNUITY AND AN ANNUITY DUE?

Ordinary Annuity
0 1 2 3
I%

PMT PMT PMT

Annuity Due
0 1 2 3
I%

PMT PMT PMT

 Future Value - Annuity
If you invest $1,000 each year at 8%, how
EXAMPLE
much would you have after 3 years?
1
 Find the amount of an ordinary annuity
consisting of 12 monthly payments of $100
that earn interest at 12% per year

EXAMPLE compounded monthly?

2
 Present Value - Annuity
What is the PV of $1,000 at the end of each of
the next 3 years, if the opportunity cost is 8%?
EXAMPLE

3
 Find the present value of an ordinary annuity
consisting of 24 monthly payments of $100
each and earning interest of 9% per year
compounded monthly.

EXAMPLE

4
 Sinking Fund
The proprietor of Carson Hardware has
decided to set up a sinking fund for the
purpose of purchasing a truck in 2 years’ time.
EXAMPLE It is expected that the truck will cost $30,000.

5 If the fund earns 10% interest per year

compounded quarterly, determine the size of
each (equal) quarterly installment the
proprietor should pay into the fund
 Mortgage Payment
The Blakelys borrowed $120,000 from a bank
to help finance the purchase of a house.

The bank charges interest at a rate of 9% per

EXAMPLE year on the unpaid balance, with interest
computations made at the end of each month.
6 The Blakelys have agreed to repay the loan in
equal monthly installments over 30 years.

How much should each payment be if the

loan is to be amortized at the end of term?
Conclusion