Chapter 10 Annuities, Stocks, and Bonds

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Chapter 10 Annuities, Stocks, and Bonds

• Section 1
• Annuities and Retirement Accounts

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Objective 1

• Define the basic terms involved with annuities.

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Terminology

• From Chapter 9
• Present Value
• Future Value
• Annuities are
• a series of equal payments made at regular
  intervals.

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Ordinary Annuity

• Payments are made at the end of each period.
• monthly quarterly semiannually annually
• The time between payments is called the payment
  period.
• The time from the first payment through the final
  payment is the term of the annuity.

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Ordinary Annuity

• Compound interest is applied to each payment.
• The total amount of money in the account at the
  end of the term is called the amount of annuity
  or future value of the annuity.

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Compute FV of an Ordinary Annuity

• You can use the compound interest table in Ch 9
  Section 1 (page 364).

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Compute the FV of an Ordinary Annuity

• A person deposits 500 into an annuity at the end
  of each year for 5 years. The account pays 4
  compounded annually.

Now
500
500
500
500
500
500.00
520.00
500 x 1.04000
500 x 1.08160
540.80
500 x 1.12486
562.43
584.93
500 x 1.16986
2708.16
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Objective 2

• Compute the amount of an annuity

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Compute Annuity Amount

• Amount Payment x Number from Annuity Table

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Compute Annuities with Table

• Table on page 397

i Interest rate per period
n number of periods in annuity
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Using the Table
Example 1 (of 2) 7500 is deposited semiannually
for 10 years _at_ 6. Compute the amount of the
annuity and the interest earned.
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Using the Table
Example 2 (of 2) 3500 is deposited quarterly for
4 years _at_ 10. Compute the amt of the annuity
and the interest earned.
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Objective 3
Compute the amount of an annuity due
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Annuity Due

• Ordinary Annuity
• Payments are made at the end of each period.
• Annuity Due
• Payments are made at the beginning of each period.

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Compute the FV of an Annuity Due

• A person deposits 500 into an annuity at the
  beginning of each year for 5 years. The account
  pays 4 compounded annually.

Now
500
500
500
500
500
520
500 x 1.04000
540.80
500 x 1.08160
500 x 1.12486
562.43
500 x 1.16986
584.93
608.33
500 x 1.21665
2816.49
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Using the Table for Annuity Due Problems

• You can use the table on p. 397 if you make a few
  adjustments
• Add 1 to the number of periods.
• Multiply the table value by the periodic deposit.
• This will overstate the annuity amount by one
  payment
• Subtract 1 payment from this amount.

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Compute Annuity Due Using Table 1 of 2

• Compute the amount of annuity due and the amount
  of interest earned.
• 9500 deposited semiannually at 4 for 9 years.

Number of Periods 1 __________
Multiply periodic payment by table value
_______________
Subtract one payment from above _______________
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Compute Annuity Due Using Table 2 of 2

• Compute the amount of annuity due and the amount
  of interest earned.
• 3800 deposited quarterly at 8 for 3 years.

Number of Periods 1 __________
Multiply periodic payment by table value
_______________
Subtract one payment from above _______________
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Practice

• Textbook pages 401 402
• 6, 12, 17

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Solutions
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Solutions
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Solutions