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Annuities: Calculate Annuity Payment - Funding an Annuity

College-Cram.com:: Finance:: Annuities:: Calculate Annuity Payment - Funding an Annuity
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Description: Calculate the payment required for an ordinary annuity with a step by step example using your values for the periodic interest rate, number of periods, and future value.
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Contents

  1. Annuities and Annuity Payments
  2. Formula to Calulate the Payment Amount of an Ordinary Annuity
  3. Calculate Annuity Payment: Funding an Ordinary Annuity
  4. Annuity Resources
  5. Time Value of Money Resources

Annuities and Annuity Payments

Many people add to a retirement account at regular intervals through payroll withholding. You may have a savings goal. Solving for an annuity payment is one way to figure out how much you should be saving in order to meet your goal. First, let's define our terms.

An annuity is a stream of payments made through time. A stream of equal payments at equal time intervals is a fixed annuity. If those payments are made at the end of each time period (month, quarter, year, etc...) it is an Ordinary Annuity. If the payments are due at the beginning of each period, it is an Annuity Due.

The payment amount, interest rate, and number of payments all contribute to the future value of the annuity. Any annuity calculation has these four variables, and with any three you can find the fourth.  

The formula and example below calculates the periodic payment required for an ordinary annuity, with a given interest rate and number of payments (periods), in order to achieve a desired future value. This assumes a starting value of zero.

This formula can also be manipulated to calculate the payments from an existing sum, which would find the payouts that would draw the annuity down to an ending value of zero.

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Formula to Calulate the Payment Amount of an Ordinary Annuity

PMT = FV(OA) / [((1 + i)n - 1) / i ]  where:

  • FV(OA), or Future Value of Ordinary Annuity: the value of the annuity at time t=0
  • PMT: Payment amount (value) of the individual payments in each period
  • i: periodic interest rate that gets compounded for each period of time

    (periodic rate may be determined by dividing an annual rate by the number of periods in a year)

  • n: number of peroids (same as the number of payments)

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Calculate the payment required for an ordinary annuity with a step by step example using your values for the periodic interest rate, number of periods, and future value.

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Annuity Resources

  • Future Value of Annuity Due - Calculate the Future Value of an Annuity Due with a step by step example using your values for the periodic interest rate, number of periods, and periodic payment amount.
  • Future Value of an Ordinary Annuity - Calculate the Future Value of an Ordinary Annuity with a step by step example using your values for the periodic interest rate, number of periods, and periodic payment amount.

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Time Value of Money Resources

  • About Interest Rates - The topic of interest rates are more complicated than you might think. This tutorial covers the relevant terminology, including APR, APY, and the yield curve.
  • Compound Interest - Calculating compound interest, as used in mortages, is now much easier. Learn how to find the interest using the principal, number of compounding periods, and interest rate. Use your own values for an added bonus!
  • Compound Interest Made Simple - Compound interest is the method of finding interest where interest is charged on the principal as well as the interest already accumulated. Review a simpler method for finding compound interest with this tutorial.
  • Compound Interest - Bottomless Worksheet - Use this Bottomless Worksheet to get endless practice calculating compound interest from the principal, number of periods, and interest rate. Ten new problems to solve, a printed copy, and an answer sheet are all only a click away.
  • Present Value - This Flash tutorial walks you through the steps to calculate present value from the future value, interest rate, and number of maturity periods. You can enter your own values, too.
  • Present Value - Bottomless Worksheet - Get endless practice with this Bottomless Worksheet in calculating present value from future value, number of periods, and interest rate. At a button-click it creates ten more problems for you to solve, complete with printed copy and answer sheet.
  • Simple Interest - Calculating simple interest is a snap with this Formula Solver. Learn how to find the interest using the principal, number of interest periods, and interest rate. Use your own values to check your homework!
  • Simple Interest - Bottomless Worksheet - With this Bottomless Worksheet you can get endless practice on calculating simple interest from the principal amount, number of periods, and interest rate. A printed copy, answer sheet, and another ten problems are all just a button-click away.
  • Calculating Future Value - Future value is a term given to the amount of money we would have at some point in the future, based on what happens between now and then. Use this tutorial to learn how to calculate the future value of an annuity given the present value, periodic interest rate, and number of periods.
  • Discounting Future Value - Discounting the future value is the process of figuring out what that future value is in present-day money. Use this tutorial to learn how to calculate the discounted future value given the future value, periodic interest rate, and number of periods.

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