The annuity is a financial term; mostly addressed in the financial theory to explain the lapsing flow of fixed payments that are considered over the set period of time. The interest rates and future value that are the concepts ruled by time value of money are mostly associated to annuity while considering payment streams. The insurance monthly payments, home mortgage payments and regular deposits to saving accounts are the general or routine examples of annuity that is often observed from day to day. The dates regarding payments decide the annuity type.
The successive payment or receipts that are received on the regular basis or equally spaced intervals is termed as annuity. In ordinary annuity the receipt session is held at the end while in annuity due the payments are to be submitted at the beginning of the session or the period.
The future value of annuity calculates the future value generated by the calculating the total equal payments in the stream at the given rate at the predefined time span.
FV = PMT [((1 + i)n – 1) / i]
The FV as evident from the name is future value of annuity, PMT refers to Periodic payment amount, where as n and i refers to number of compounding periods and interest rate respectively.
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