Annuities theory Flashcards
What are annuities?
They are a series of payments made at regular intervals such as annually, quarterly, etc.
What are level annuities?
They are strategies required for annuities with the same payment amount.
What does s-angle-n represent?
It is the accumulated value of a level annuity-immediate with payments of 1$ for “n” periods valued on the last payment date.
What does a-angle-n represent?
It is the present value of a level annuity-immediate with payments of 1$ for “n” periods valued one period before the first payment date.
What is an annuity-immediate?
It is an annuity where the comparison date of the present value is one period before the first payment.
What is an annuity-due?
It is an annuity where the comparison date of the present value is on the first payment date.
What does s-double-dot-angle-n represent?
It represents the accumulated value of a level annuity with payments of 1$ for “n” periods valued one period after the last payment date.
What does a-double-dot-angle-n represent?
It is the present value of a level annuity with payments of 1$ for “n” periods valued on the first payment date.
What is a deferred annuity?
It’s an annuity that starts after a deferred period
What is the concept of a perpetuity?
It is an annuity with payments continuing forever.
What is a perpetuity-immediate?
It is a perpetuity with payments starting one period after the comparison date.
What is a perpetuity-due?
It is a perpetuity with payments starting at the comparison date.
What is a balloon payment?
It is when the last payment is larger than the regular payment.
What is a drop payment?
It is the additional amount made 1 period after the last regular payment.
What is the portfolio rate method?
All deposits earn the same interest during the same time period.
What are the components of the portfolio rate method?
- This is similar to making multiple deposits into a savings account.
- The savings accounts function like a single portfolio.
- When the interest rate on the savings account changes, the interest rate for the entire fund (or portfolio) changes.
What is the yield curve method?
It is when interest is based on when money was deposited (when payment occurs).
What are the components of the yield curve method?
- Consider each deposit as a separate fund where the interest rate for a new deposit earns a different interest rate.
- In other words, at a given time, different funds may be credited with different interest rates.
What happens in a non-level annuity with arithmetic progression if Q<0?
It means that the payment is decreasing over years.
What is happening if in a non-level annuity, P=Q?
We have an increasing annuity where the first payment is equal to the payment increase.
What are “off” annuities?
They are annuities with payments occurring more or less frequently than interest convert.
What is the j-effective method?
It consists of converting an interest rate to an equivalent effective rate “j” that matches the payment frequency.
What are continuous varying annuities?
It is when payments are made continuously and the rate of payment at any exact moment “t” is “t”
What are block payments?
It is when payments that stay level for a period of years, then change to another level for another period of years, etc.
