Fixed Income Mathematics
Offering explanations, exercises, and examples without demanding sophisticated mathematics, this self-teaching book will serve as a gateway to financial mathematics and to increased competence in business analysis.
TABLE OF CONTENTS Fixed Income Mathematics
Chapter 7: The Future Value (or Amount) of an Annuity
Suppose you make a periodic payment, of a fixed amount, into an investment fund, and the fund earns a given interest rate for a period of time. How much will it amount to at the end of the given time period? Your payments form an annuity certain and the value they will amount to are referred to as the future value of the annuity, or the amount of the annuity. When you finish this chapter, you should understand what the future value of an annuity means, how to compute its value, and where it might be used in practical work.
USES OF THE FUTURE VALUE OF AN ANNUITY
Here are some examples of the future value of an annuity.
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You are in your employer s 401(k) program and contribute a certain amount every payday to your 401(k) fund. Your employer matches part of your contribution. Assuming a given rate of return, how much will you have when you are ready to retire?
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You are giving each of your children $12,000 annually, the maximum amount allowed without gift and estate tax considerations. How much will they have when you retire, assuming a given earnings rate in the funds?
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You have bought an annuity from an insurance company and contribute a certain amount annually to the annuity. How much will you have at a given future time?
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You contribute $2,000 annually to your IRA. How much will you have at retirement?
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You contribute $500 monthly to a fund for the down payment...
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