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Annuities: Future Value of an Annuity Due

College-Cram.com:: Finance:: Annuities:: Future Value of an Annuity Due
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Description: 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.
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Contents

  1. Annuity and Annuity Due
  2. Formula for Future Value of Annuity Due
  3. Future Value of an Annuity Due
  4. Annuity Resources
  5. Time Value of Money Resources

Annuity and Annuity Due

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. We can convert the valuation of an ordinary annuity to an annuity due by compounding the resulting future value for one more period. (Since the payments for an annuity due are all due at the beginning of the period, instead of the end like with an ordinary annuity, this makes it effectively one period sooner, but not one more payment.)

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 in the following section and Formula Solver! series example further below calculates the future value of an ordinary annuity from the interest rate, payment amount, and number of payments (periods) and then compounds for one more period to calculate the future value of an annuity due.

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Formula for Future Value of Annuity Due

To Calculate the Future Value of an Annuity Due FV(AD), we first treat it as an ordinary annuity, and then compound that value for one more period. The Future Value of an Ordinary Annuity FV(OA) formula is:

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

    PMT = periodic payment

    i = periodic interest rate  (annual rate divided by number of periods per year)

    n = number of periods (or number of payments)

This resulting FV(OA) is compounded one more time to convert to Future Value of an Annuity Due:

FV(AD) = FV(OA) • (1 + i)

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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.

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Annuity Resources

  • Future Value of an Ordinary Annuity - Calculate the Future Value of an Annuity with a step by step example using your values for the input variables in this Formula Solver! series tutorial.
  • Present Value and Future Value - Annuities are defined as a stream of payments made over time. Use this tutorial to learn how to solve present and future value of annuity problems with financial calculators or spreadsheet functions.

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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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