OBJECTIVES

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OBJECTIVES

• 1. UNDERSTAND ANNUITIES
• 2. ADJUSTING ANNUITIES FOR INFLATION
• 3. UNDERSTAND DIFFERENTIATE RATES
• 4. USE OF GRADUATED PMT ANNUITY
• 5. USING THE CPI

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Annuity

• ANNUS YEAR
• CASHFLOW GIVEN OR RECEIVED OVER A REGULAR TIME
  PERIOD
• A STIPEND

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Annuities

• Perpetual Finite
• Ordinary Ordinary
• Annuity-due Annuity-due

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VALUATION OF APERPETUAL ANNUITY
CAPITALIZING INCOME
Page 2 Appndx
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CAPITALIZATION ASSUMPTIONS

• Cashflow will continue forever
• Cashflow will never change

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PERPETUAL ANNUITIES BOP
SAME FORMULA WHEN PMT, C, GROWS AT RATE
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WHEN GROWTH IS ASSUMED
pertains to steady rate of growth in C
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Finite Annuities
INFINITE ANNUITY A
INFINITE ANNUITY B
n
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EOP and BOP

• PV EOP (1i) PV BOP

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Finite Annuity BOP
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Finite Annuity BOP w/Growth
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INFLATION ADJUSTED RATE

• A RATE INTENDED TO OFFSET THE LOSS OF PURCHASING
  POWER OF THE DOLLAR

I.A.R. 1
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Nominal vs. Effective Rate
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CONTINUOUS COMPOUNDING