BU283 Lecture Notes - Lecture 5: Savings Account, Mutual Fund, Cash Flow
Document Summary
Definition: an annuity is a stream of equal cash flows that are paid out (or received) at equal intervals: ordinary annuity. An annuity for which the payments occur at the end of each period: annuity due. An annuity for which the payments occur at the beginning of each period. (ex. Leasing: you pay your rent at the beginning of each month) Draw a time line for a five payment ordinary annuity. If you calculate the future value of an ordinary annuity how many years between the first payment and the date of the future value: 3, 4, 5, 6. Given the end-of-period timing assumption, the first payment occurs at year. 1 and the future value is calculated on the date of the last payment (year 5), so only four years between them. Example: you expect to receive ,000 at the end of each of the next five years. You will invest each in a bank account paying 10% interest.
