Perpetual annuity:
An annuity whose payments are continue forever is called perpetual annuity or
perpetuity. In this case, PV =
i
a
; where
a
= payment of each installment,
i=
rate of interest.
Present value of an annuity:
The present value of an annuity is the sum of the present values of all the
payments of annuity at the beginning of the annuity.
Future value of an annuity:
The future value of an annuity is the sum of all payments made and interest
earned on them at the end of the term of annuities.
Sinking Fund:
A type of savings fund, in which deposits are made regularly, with compound interest
earned, to be used later for a specific purpose, such as purchasing equipment or buildings, is called
sinking fund.
Amortization:
A loan with fixed rate of interest is said to be amortized if both principal and interest are
paid by a sequence of equal payments with equal time periods. Purchasing a car by making a series of
periodic payments is an example of a loan that is amortized.
Formulae:
1.
࠵?
.
࠵?
.
=
࠵?࠵?࠵?
(for (i) exact method
࠵?
=
!"#$
!"#
and for ordinary method [or Banker’s rule]
࠵?
=
!"#$
!"#
)
2.
࠵?
.
࠵?
.
=
࠵?
−
࠵?
= Future value – Present value
3.
(i)
࠵?
=
࠵?
(
1
+
࠵?
)
!
, when interest is compounded yearly