Annuity

Posted in Finance, Accounting and Economics Terms, Total Reads: 1311
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Definition: Annuity

An annuity refers to a stream of fixed payments/receipts over a fixed interval of time for a specified time period. A slight variation of an annuity is perpetuity with the only difference that the fixed stream of payments/receipts goes on for an infinitely long time.

An annuity can also be segregated into ordinary annuity and an annuity-due based on whether the cash flows are at the end of a period or at the beginning of a period.

Ordinary Annuity

The cash flows are the end of each period.

 Annuity 1

 

Annuity- Due

The cash flows are at the beginning of each period.

Annuity 2  

Where:

PV: Present value of annuity

FV: Future value of annuity

P: Periodic Payment

i: Rate of interest per period

n: No. Of periods

 

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