Annuity

An annuity is a series of equal amount received or paid over a specified number of equal time periods. It is very important to know when amounts are paid or received while working with annuities. An annuity in which amounts are paid or received at the end of the fiscal period is known as an ordinary annuity. An annuity in which amounts are paid or received at the beginning of the fiscal period is known as an annuity due.

Present Value of An Annuity

The present value of the annuity is the present value of the series of the equal cash flows that occurs in the future. In other words, it is the amount that should be invested now and, if it is left to generate compound interest, would give for a payment or receipt of a series of the equal cash flow at regular intervals. Over time, the present value balance is increased periodically for interest and is decreased periodically for each receipt or payment. Thus the last cash flow in the series exhausts the balance on deposit.

An annuity is the distribution of money earned on the investment on a given schedule such as biannually, annually or quarterly. Usually, an annuity is utilized as part of the retirement plan, in order to ensure a stable and fixed income once the recipient or annuitant, stops working, and the annuity might be designed in order to give income for two. A general type of annuity is the retirement pension.  When the retiree was working, he paid into the pension fund that was invested and after the retirement, the return on the initial investment takes the form of the annuity distributed to the retiree.

Questionnaire:

• What is annuity?
• What is ordinary annuity?
• What is annuity due?
• Explain present value of annuity?
• Give an example of annuity?