Unit 2.1 Annuities

What 5 times can interest be compounded?

• Annually (1)

• Semi-annually (2)

• Quarterly (4)

• Monthly (12)

• Daily (365)

What is the formula for Interest per Conversion Period?

Interest per conversion period is given in what unit?

%

What is the formula for Number of Compounding/Conversion Periods?

Define annuity

“A series of equal payments that are made at equal intervals of time”

Define ordinary annuity

“Annuity where the payments are made at the end of each payment interval”

Define simple annuity

“Annuity where the payment frequency is the same as the interest compounding frequency”

What does PV and PMT stand for?

• Present Value ($)

• Payment ($)

What is the formula for present value?

What is the formula for payment?

What do i and n represent in equations for annuity?

• i is for interest rate per conversion period (6 decimal places)

• n is the number of conversion periods

i will come as a percentage but we need a decimal. What do we do?

Divide by 100

If both sides of an equation are negative, what is a trick to make them both positive?

Divide both sides by -1

If you have a negative exponent [e.g. (4)^-n], what could you do to make it positive?

Multiply by ^-1 to cancel it out [e.g. [(4)^-n]^-1

How do you use Microsoft Excel to solve for PMT, PV, n, i?

• Fomulas tab

• Insert Function tab

• Search for the unknown

When searching for n on excel (called NPER), what important thing do you have to do with PV? Why?

• You must make PV negative

• Because you owe that money

The total cost of a loan is ___ + ____

• The money you borrowed

• The interest

Total cost of a loan can be calculated by multiplying-

-the monthly payment (including interest) by the number of payments

How you would calculate total interest paid on a loan?

Subtracting the total cost of what you ended up paying minus the amount initially borrowed