PVIFs are found in Appendix B of text o Interest rate (i) used in PV calculations is known as the discount rate, or the opportunity cost interest rate used to bring future dollars back to the present. Annuities - Mortgage payments, pension funds, insurance obligations and interest received from bonds all involve annuities - Annuity – a series of equal dollar payments coming at the end of each time period for a specified number of time periods (years, months, etc)
o life insurance benefits, lottery payments, retirement payments, loans, bond interest payments o a sequence of equal cash flows, occurring at the end of each period - because annuities occur frequently in finance, they are treated specially o bond interest payments, and mortgage payments Compound annuities - Compound annuity involves depositing or investing an equal sum of money at the end of each year (or time period) for a certain number of years (or time periods, e.g. months) allowing it to grow. o Perhaps you are saving your money for education, a new car, or a vacation home, you’ll want to know how much your savings will have grown by some point in the future Future value of an annuity equation using textbook factor tables - FV sub n = the future value of a sum of money at time (n) - PMT – the payment made at the end of each time period - FVIFA sub I, n= the future-value interest factor for an annuity for a given interest rate (i) and period number (n) - Used to determine the future value of a stream of payments such as the value of your 401(k) contributions - FVIFAs are found in Appendix C of the text Calculating the Future value of an annuity: an IRA Present value of an annuity equation - Present-value interest factor of an annuity (PVIFA i, n) – multiplier used to determine the present value of an annuity.
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