Annuity Basics
What is Annuity?
A series of equal payments made at regular intervals.
What does future value tell us?
How much money will be worth at a future date.
What does present value mean?
The value today of money received or paid in the future.
What is amortization?
Paying off a loan over time through scheduled payments.
When are payments made in an ordinary annuity?
At the end of each period.
What does the future value of an ordinary annuity calculate?
The accumulated value of equal end of period payments + interest.
What does the present value of an ordinary annuity calculate?
What a series of equal end of period payments is worth today.
What are the two main parts of an amortizing loan payment?
Principal and Interest.
When are payments made in an annuity due?
At the beginning of each period?
If you save $100 at the end of each month for 12 months, how much do you deposit in total?
$1,200, before interest.
Does present value generally increase or decrease when the discounted rate increases?
Decrease.
What is principal?
The amount of money borrowed or the unpaid loan balance.
What is the main difference between an ordinary annuity and an annuity due?
The timing of payments: end vs beginning of each period
Which has a higher future value at a positive interest rate: an ordinary annuity or an annuity due?
An annuity due, because deposits earn interest for longer.
Which has a higher present value at a positive discount rate: an ordinary annuity or an annuity due?
An annuity due, because payments occur earlier.
What happens to the interest portion of each payment over time on a standard fixed rate amortizing loan?
It decreases as the remaining loan balance decreases.
Is rent paid at the beginning of each month usually an ordinary annuity or an annuity due?
An annuity due.
You deposit $1,000 at the end of each year for 3 years at 0% interest. What is future value?
$3,000
If you receive $200 at the end of each year for 4 years at 0% interest, what is the present value?
$800
What is an amortization schedule?
A table showing each payment, interest, principal repaid, and remaining loan balance.