![]() The future value of an ordinary annuity ( FVOA) is: Future Value of anĪnd the future value of an annuity due ( FVAD) is: Future Value of an Annuity Without going through an extensive derivation, just note that the future value of an annuity is the sum of the geometric sequences shown above, and these sums can be simplified to the following formulas, where A = the annuity payment or periodic rent, r = the interest rate per time period, and n = the number of time periods. The equation for the future value of an ordinary annuity is the sum of the geometric sequence:įVOA = A(1 + r) 0 + A(1 + r) 1 +. The equation for the future value of an annuity due is the sum of the geometric sequence:įVAD = A(1 + r) 1 + A(1 + r) 2 +. The future value of an annuity is simply the sum of the future value of each payment. The present value of an annuity is the present value of equally spaced payments in the future. ![]() Most annuities are ordinary annuities.Īnalogous to the future value and present value of a dollar, which is the future value and present value of a lump-sum payment, the future value of an annuity is the value of equally spaced payments at some point in the future. The amount of the annuity is the sum of all payments.Īn annuity due is an annuity where the payments are made at the beginning of each time period for an ordinary annuity, payments are made at the end of the time period. ![]() These equal payments are called the periodic rent. ![]() Usually, the time period is 1 year, which is why it is called an annuity, but the time period can be shorter, or even longer. For instance, how much of a mortgage can I afford if I can only pay $1,000 monthly? How much money will I have in my IRA account if I deposit $2,000 at the beginning of each year for 30 years, and earns an annual interest rate of 5%, but is compounded daily?Īn annuity is a series of equal payments in equal time periods. Understanding annuities is crucial for understanding loans, and investments that require or yield periodic payments. Present Value and Future Value of an Annuity, Net Present Value, with Formulas and Examples › Money › Investment Fundamentals The Future Value and Present Value of an Annuity ![]()
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