COMM 298 Lecture 7: 7.pdf
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Recall: annuities (cid:73) definition: (cid:73) an annuity is a series of level cash flows that occur at the end of each period for a finite number of periods. 1+ r n (cid:73) recall: using the formula gives you the same answer as discounting each cash flow individually, i. e. pv. You have to memorize one of the formulas above. They are mathematically equivalent, so pick the one you are most comfortable with. Future value of an annuity formula (cid:73) consider an n-period annuity, where payments of a are made at the end of each period. The periodic effective interest rate is r. then, using algebra, the future value of the annuity is given by: Fv (1+ r)n (1+r ) (1+r ) n n. Fv n = a r n (1+r ) n = a. 1 1 n = a r r (1+ r)n 1. Assume that the interest rate you earn is 1% per month. (cid:73) we are looking for fv48.
