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Lecture 13 - Annuities and Mortgages

The document discusses key concepts related to annuities including: future value of annuities which calculates the value of regular payments at a future date given an interest rate; present value of annuities which calculates the amount needed now to produce future payments; and examples of mortgages which involve borrowing a sum to be paid back with interest over time in regular installments. Practice problems are provided to help apply these annuity and mortgage concepts.

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M. Amin Qureshi
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32 views15 pages

Lecture 13 - Annuities and Mortgages

The document discusses key concepts related to annuities including: future value of annuities which calculates the value of regular payments at a future date given an interest rate; present value of annuities which calculates the amount needed now to produce future payments; and examples of mortgages which involve borrowing a sum to be paid back with interest over time in regular installments. Practice problems are provided to help apply these annuity and mortgage concepts.

Uploaded by

M. Amin Qureshi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Discussion Topics

01 Annuities

02 Future Value of Annuity

03 Present Value of Annuity

04 Practice Problems
Annuities
 An annuity is a series of same size payments made at equal intervals. The payments (deposits)
may be made weekly, monthly, quarterly, yearly, or at any other regular interval of time.

 Examples:
 Regular deposits to a savings account.
 Monthly home mortgage payments.
 Monthly insurance payments.
Future Value of an Annuity
 Future value (FV) of an annuity is a measure of how much a series of regular payments will
be worth at some point in the future, given a specified interest rate.
Future Value of an Annuity
Alternate symbols

Some textbooks use S instead of FVA and R instead of PMT


Future Value of an Annuity (Example)
 A person wishes to deposit $100 per year in a saving account which earns interest of 5% per
year compounded annually. Assume the first deposit is made at the end of this current year and
additional deposits at the end of each year for the total 20 years period. To what sum will the
investment grow at the time of 20th deposit?
Future Value of an Annuity (Example)
 A mother wishes to set up a saving account for her son’s education. She plans investing $750 when her son is 6 months
old and every 6 months thereafter. The account earns interest at a rate of 8 percent per year, compounded semiannually.

a. To what amount will the account grow by the time of her son’s 18 th birthday?
b. How much interest will be earned during this period?
Present Value of an Annuity
 In contrast to the future value calculation, a present value (PV) calculation tells you how
much money would be required now to produce a series of payments in the future, again
assuming a set interest rate.
Example: Present Value of an Annuity
 A person recently won a state lottery. The terms of the lottery are that winner will receive
annual payments of $1,000 at the end of this year and each of the following 4 years. If the
winner could invest money today at the rate of 5% per year compounded annually, what is the
present value of the five payments?
Mortgage
 When a person purchases some property by paying partial amount and leaves the remaining
amount (mortgage) to be paid over years, the borrower repays the remaining amount (loan)
with interest, until he or she owns the property.
Example: Mortgage
 A person pays $100,000 for a new house. A down payment of $30,000 leaves a mortgage of
$70,000 with interest computed at 10.5% per year compounded monthly. Determine the
monthly mortgage payment if the loan is to be repaid over in 20 years? Also compute the total
interest for this loan period.
 Solution:
n = 20*12 = 240 Payments
Total Interest = $698.87 * 240 - $70,000
using the formula, Total Interest = $97,728.80
where PVA = $70,000

PMT = $698.87

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