🔁

Annuity

Definition

A series of equal payments made at regular intervals over a fixed period.

How It Works

PV of an ordinary annuity = PMT × [(1 - (1+r)^-n) / r]. Annuity due shifts all payments one period earlier.

Formula

PV = PMT × [(1 - (1+r)^{-n}) / r]

Example

A $1,000 annual payment for 5 years at 8% has PV = $1,000 × 3.9927 = $3,992.71.

Common Misconceptions

  • Annuities last forever (that is a perpetuity)
  • Annuity due and ordinary annuity have the same PV

Need Help Understanding Finance Class Concepts?

Snap a photo of any textbook page or problem for personalized explanations at three detail levels.

Download FinanceIQ

FAQs

Common questions about Annuity

An annuity has a fixed number of payments. A perpetuity pays forever.

An annuity where payments occur at the beginning of each period instead of the end. Its present value equals the ordinary annuity PV multiplied by (1+r), making it worth more because each payment arrives one period sooner.

More Glossary Terms