3.3 Future Value of an Annuity; Sinking Funds

Question 1

What is annuity?

Answer 1

An annuity is any sequence of equal periodic payments.

Question 2

What is ordinary annuity?

Answer 2

If payments are made at the end of each time interval, then the annuity is called an ordinary annuity.

Question 3

What is future value?

Answer 3

The amount, or future value, of an annuity
is the sum of all payments plus all interest earned.

Question 4

In general, if R is the periodic deposit, i the rate per period, and n the number of periods, then the future value is given by…

Answer 4

Question 5

What is the general formula for future value?

Answer 5

Question 6

Theorem: Future value of an Ordinary Annuity

Answer 6

Question 7

What is a Sinking fund?

Answer 7

In general, any account that is
established for accumulating funds to meet future obligations or debts is called a
sinking fund.

Question 8

How do we approximate Interest rates?

Answer 8

Approximating Interest Rates
Algebra can be used to solve the future value formula (6) for PMT or n but not for i.
However, graphical techniques or equation solvers can be used to approximate i to as
many decimal places as desired.