Annuities

Question 1

[FILL IN THE BLANKS] (???) is a series of periodic payments (or receipts), usually made in equal amounts. The payments are
computed by the (???) method and are made at equal intervals of time, such as annually, quarterly, or monthly. The word (???) originally referred only to annual payments, but it now applies to payment intervals of any length of time.

Answer 1

1. Annuity
2. Compound interest method
3. Annuity

Question 2

[FILL IN THE BLANKS] The period of time between two successive payment dates is called the (???). The time between the beginning of the first payment interval and the end of the last payment interval is called the (???) of the annuity.

Answer 2

1. Payment interval
2. Term

Question 3

[IDENTIFICATION] The term of annuity begins and ends on definite dates, such as a five-year term from January 1,
2008 to January 1, 2013.

Answer 3

Annuity certain

Question 4

[FILL IN THE BLANKS] The term of a (???) begins on a definite date but never ends, such as a principal that remains forever untouched, drawing interest. The length of the term is infinite.

Answer 4

Perpetuity

Question 5

[FILL IN THE BLANKS] The term of (???) begins on a definite date, but the ending date is not fixed in advance. Instead, the ending date depends on some condition happening in the future. For example, life insurance premiums.

Answer 5

Contingent Annuity

Question 6

Periodic payments are made at the end of each payment interval.

Answer 6

Ordinary Annuity

Question 7

Periodic payments are made at the beginning of each payment interval.

Answer 7

Annuity Due

Question 8

Periodic payments are made at the end of each payment interval. However, the term of the annuity does not begin until after a designated period of time.

Answer 8

Deferred Annuity

Question 9

The payment interval coincides with the interest compounding period. In other words, the interest is computed on payment date. For example, when the payment interval is one month, the interest is compounded monthly.

Answer 9

Simple annuity

Question 10

The payment interval does not coincide with the interest compounding period. For example, payment interval is one quarter, and the interest is compounded monthly.

Answer 10

Complex Annuity or General Annuity

Question 11

CALCULATING FUTURE VALUE OF AN ORDINARY ANNUTIY MANUALLY(4)

Answer 11

1. Step 1 For period 1, no interest calculation is necessary, since money is invested at the end of the period.
2. Step 2 For period 2, calculate interest on the balance and add the interest to the previous balance.
3. Step 3 Add the additional investments at the end of period 2 to the new balance.
4. Step 4 Repeat steps 2 and 3 until the end of the desired period is reached.

Question 12

CALCULATING FUTURE VALUE OF AN ORDINARY ANNUTIY DUE MANUALLY

Answer 12

1. Step 1 Calculate the interest on the balance for the period and add it to the previous balance.
2. Step 2 Add additional investment at the beginning of the period to the new balance.
3. Step 3 Repeat steps 1 and 2 until the end of the desired period is reached.