January 20, 2011
 1
st
hour
Difference between Annuities and Annuities Due:
•
The present value of a regular annuity is found one period before the first cash flow.
•
The future value of a regular annuity is found on the same period of the last cash flow.
•
The present value of an annuity due is found on the same period of the first cash flow.
•
The future value of an annuity due is found one period after the last cash flow.
PV
AD
=PV
A
(1+i)
FV
AD
=FV
A
(1+i)
Annuity – Same payment in each period
Regular Annuity – Classic Interpretation: Payments occur at the end of the period. (Car loan,
Mortgage – payments occur at the end of every month)
PV: One period before first payment
FV: As of last payment
Annuity Due – Classic Interpretation: Payments occur at the beginning of the period.
(Insurance – you pay your premium at the beginning of each period)
PV: As of first payment
FV: One period after last payment
Simple interest doesn’t take into account compounding effect of interestoninterest.
(1+i): The value of 1 maintains original amount. Invest early to capitalize on power of
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 Spring '06
 Tapley
 Finance, Time Value Of Money, Annuity, Future Value, Period, compounding periods

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