F4 - 4.1 Present Value & Annuities

Question 1

What is the meaning of ‘Annuity’?

Answer 1

• Repeated Cash Flow (Payments or Receipts) on a periodic basis

OR

• Regular Recurring Payments and Receipts of money

Question 2

What is the meaning of ‘Ordinary Annuity’?

Answer 2

• ‘Ordinary Annuity’ means payments are made at the END OF EACH PERIOD e.g. Bond interest payments
• Ordinary Annuity = Annuity in Arrears

Question 3

What is the meaning of ‘Annuity Due’?

Answer 3

• ‘Annuity Due’ means the payments are made at the BEGINNING OF EACH PERIOD e.g. Rent Payments
• Annuity Due = Annuity in Advance

Question 4

Explain Present Value Concept

Answer 4

It is the amount that must be invested…

• NOW i.e. One Time [ like Lumpsum investment in Mutual Funds ] i.e. PV of $1

OR

• OVER A PERIOD i.e. Series of Regular Payments at the end of each year [like SIP in Mutual Funds ]
  i.e. PV of an Ordinary Annuity

to get a the desired amount at the end of the desired period