Annuity

An annuity is a fixed sum paid at regular intervals under certain conditions.

The interval may be an year or half year or quarter year.
If nothing is mentioned, we take it as one year.
An annuity payable for a fixed number of years is called annuity certain.
If the annuity continues forever, then it is called perpetuity.
If the amounts are paid at the end of each period, then it is called immediate
annuity. If the payments are made at the beginning of each period, then it is
called annuity due.
An annuity is called a deferred annuity if the payments are deferred or
delayed for a certain number of years.
When an annuity is deferred by n years, it is said to commence after n years
and the first installment in paid at the end of n ! "# years.
$resent value of an annuity is the sum of the present values of all the
payments.
A freehold estate is one which yields a perpetual annuity called rent.
%emark&
In annuity the interest payable will be always compound interest.
'ormulae&
". The amount A of an annuity or immediate annuity# $ left unpaid for n years is
( )

+ = "
n
i "
i
p
A where
"((
%ate
i =
). The present value * of an annuity p to continue for n years is ( )

+ =
n +
i " "
i
p
*
,. The present value of a perpetuity is
i
p
* =
%emark&
The problems under annuity involve " ! i#
n
. To compute this one needs logarithm
tables or calculator the second is not available in the examination#.
If " ! i#
n
is given in a simple way, one can attempt a problem easily.
-xamples&
". .x/ decides to deposit %s.0(( at the end of every year in a bank which gives 12
p.a. 3.I. If the installments are allowed to accumulate, what amount he will
receive at the end of 4 years5
( )

+ = "
n
i "
i
p
A
6ere $ 7 0((, I 7 (.(1, n 7 4 years
" ! i#
n
7 " ! (.1#
4
7 ".4",
[ ] %s.8809.)0 " ".4",
(.(1
0((
A = =
). What is the present value of an annuity of %s.0((( for 8 years at 02. 3.I5
p 7 0(((: i 7 (.(0: " ! i#
n
7 (.1))9
* 7 "((((( ;" < (.1))9=
7 %s. "448(
,. A person desires to create an endowment fund to provide a pri>e of %s.0(( every
year. If the fund can be invested at "(2 p.a. 3.I, find the amount of the
endowment5
The endowment amount is the present value * of the perpetuity of %s.0((.
i
p
* =
$ 7 0(( :
"(
"
i = : * 7 %s.0(((
8. The rent annual# for a freehold estate is %s."(((((. If the 3.I rate is 02 p.a.,
what is the current value5
A freehold estate en?oys a rent in perpetuity
i
p
* =
$ 7 "(((((
"((
0
i =
( )
%s.)((((((
0
"((
"(((((
"((
0
"(((((
v = = =
( )

+ =
n +
i " "
i
p
*
0. A person invests a certain amount every year in a company, which pays "(2 p.a.
3.I. If the amount standing in his credit at the end of the tenth year is
%s."0,@8(, find the investment made every year.
$ 7 $: I 7 (.": A 7 "0@8(: " ! i#
n
7 ).0@8
( )

+ = "
n
i "
i
p
A
[ ] " ).0@8
(."
p
"0@8( =
$ 7 %s."(((.