Perpetual annuity An annuity whose payments are continue forever is called

Perpetual annuity an annuity whose payments are

This preview shows page 7 - 10 out of 34 pages.

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
Image of page 7