ACCT 301 Exam 2 - Annuities and Present/Future value

Annuity

A series of equal payments made at regular intervals.

Ordinary Annuity

An annuity in which payments occur at the end of each period.

Annuity Due

An annuity in which payments occur at the beginning of each period.

Payment (PMT)

The fixed amount paid or received each period in an annuity.

Discount Rate

The interest rate used to calculate the present value of future cash flows.

Present Value of a Single Sum

The current value of one future payment, calculated by discounting it.

Future Value of a Single Sum

The value of one current investment after interest accumulates.

Present Value of a Single Sum Formula

PV = FV ÷ (1 + r)ⁿ.

Future Value of a Single Sum Formula

FV = PV(1 + r)ⁿ.

Future Value of an Ordinary Annuity

The accumulated value of equal payments made at the end of each period.

Future Value of an Ordinary Annuity Formula

FV = PMT × [(1 + r)ⁿ − 1] ÷ r.

Present Value of an Ordinary Annuity

The current value of equal future payments made at the end of each period.

Present Value of an Ordinary Annuity Formula

PV = PMT × [1 − (1 + r)⁻ⁿ] ÷ r.

Present Value of an Annuity Due

The current value of equal payments made at the beginning of each period.

Future Value of an Annuity Due

The accumulated value of equal payments made at the beginning of each period.

Annuity Due Calculation

Calculate the corresponding ordinary annuity value and multiply it by (1 + r).

Solving for an Unknown Interest Rate

Finding the interest rate that makes a present investment grow to a specified future amount or produces a specified present value.

Solving for the Number of Periods

Finding the number of periods needed for an investment to reach a specified value at a given interest rate.

Solving for the Payment Amount

Finding the regular payment needed to reach a specified future value or produce a specified present value.

Present Value Factor (PVF)

A factor used to calculate the present value of a single future amount.

Present Value of an Annuity Factor (PVAF)

A factor used to calculate the present value of a series of equal payments.

Future Value Factor (FVF)

A factor used to calculate the future value of a single current amount.

Future Value of an Annuity Factor (FVAF)

A factor used to calculate the future value of a series of equal payments.

Matching Interest Rates and Periods

The interest rate per period and number of periods must match the frequency of payments or compounding.

I in a formula

Stands for interest

P in a formula

Stands for principal

PV in a formula

Stands for present value

FV in a formula

Stands for future value

r in a formula

Stands for interest rate per period

t in a formula

Stands for time in years

N in a formula

Stands for the number of periods

m in a formula

Stands for the number of computing periods per year

PMT in a formula

Stands for payment amount for each period

PVF in a formula

Stands for present value factor for a single sum

PVAF in a formula

Stands for present value annuity factor