WHAT IS AN ANNUITY CERTAIN?

Suppose you buy a house with a $100,000 loan and promise to make monthly payments of interest and principal of $733.76 for 30 years. Your monthly payments form a stream of equal payments, at equal time intervals, for 360 months. Such a stream of payments is called an annuity certain.

Many readers may have parents who receive a pension, or you may receive a pension yourself. They (or you) could possibly receive a Social Security pension or a retirement pension from a former employer. These pensions are also called annuities, but they are not annuities certain because they have a life contingency feature. When the person receiving the pension dies, the pension stops or perhaps is paid to someone else at a reduced amount. These pensions are called life annuities. Later in the book, we ll study how to compute their values as well. However, an annuity certain has fixed payments at equally spaced time intervals, and the payments will be paid to somebody.