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Exam FM/2 Review Annuities

Exam FM/2 Review Annuities. Basics. Annuities are streams of payments, in our case for a specified length Boil down to geometric series. Two main formulas. For annuities due (double dots), simply change denominator from i to d Once again, if unsure make a TIMELINE. Deferred Annuities.

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Exam FM/2 Review Annuities

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  1. Exam FM/2 ReviewAnnuities

  2. Basics • Annuities are streams of payments, in our case for a specified length • Boil down to geometric series

  3. Two main formulas • For annuities due (double dots), simply change denominator from i to d • Once again, if unsure make a TIMELINE

  4. Deferred Annuities • Annuity with the whole series of payments pushed back • No need to know formulas, just use TVM factors to shift

  5. Perpetuities • No new formulas, just plug in infinity for n in the originals • Interestingly, this leads to

  6. Annuities with off payments • Two Cases, assuming i is effective rate…find the effective rate per payment • 1. Multiple Interest periods per payment • 2. Multiple payments during interest period • Or you may need to use annuity symbols

  7. More Annuities • If payable continuously, continue pattern and change i to δ • Double dots and upper m’s cancel • If payments vary continuously and/or interest varies continuously (unlikely)

  8. Arithmetic progression • General formula – Present value where P is the first payment and Q is the common difference between payments. • From these, you can derive all 4 increasing/decreasing formulas (show)

  9. Calculator Highlights • Beg/End option • Always clear TVM values and check beg/end, compounding, etc options

  10. Problems • Susan and Jeff each make deposits of 100 at the end of each year for 40 years. Starting at the end of the 41st year, Susan makes annual withdrawals of X for 15 years and Jeff makes annual withdrawals of Y for 15 years. Both funds have a balance of 0 after the last withdrawal. Susan’s fund earns 8% annual effective. Jeff’s fund earns 10% annual effective. Calculate Y-X • ASM p.109 Answer: 2792

  11. To accumulate 8000 at the end of 3n years, deposits of 98 are made at the end of each of the first n years and 196 at the end of each of the next 2n years.The annual effective rate of interest is i. You are given (1+i)^n=2.0Determine i. ASM p.123 Answer: 12.25%

  12. At an effective interest rate i, i>0, both of the following annuities have the same present value X: • A 20-year annuity immediate with annual payments of 55 • A 30-year annuity immediate with annual payments that pays 30 per year for the first 10 years, 60 per year for the next 10 years, and 90 per year for the final 10 years • Calculate X ASM p.136 Answer: 575

  13. Kathryn deposits $100 into an account at the beginning of each 4-year period for 40 years. The account credits interest at an annual effective interest rate of i. The accumulated amount in the account at the end of 40 years is X, which is 5 times the accumulated amount in the account at the end of 20 years. Calculate X. ASM p.165 Answer: 6,195

  14. A perpetuity costs 77.1 and makes annual payments at the end of the year. The perpetuity pays 1 at the end of year 2, 2 at the end of year 3, … , n at the end of year (n+1). After year (n+1), the payments remain constant at n. The annual effective interest rate is 10.5%. Calculate n. ASM p.205 Answer: 19

  15. A perpetuity-immediate pays 100 per year. Immediately after the fifth payment, the perpetuity is exchanged for a 25-year annuity-immediate that will pay X at the end of the first year. Each subsequent annual payment will be 8% greater than the preceding payment. Immediately after the 10th payment of the 25-year annuity, the annuity will be exchanged for a perpetuity-immediate paying Y per year. The annual effective rate of interest is 8%. Calculate Y. ASM p.228 Answer: 130

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