11.2: Annuities
An annuity is a series of cash flows that must satisfy both of the following conditions, in order to qualify as an annuity, namely it:
- Consists of equal dollar amounts.
- Arrives (or leaves) in regular intervals.
If a series of cash flows may be defined as an annuity, we will employ an Annuity Table to figure the series’ FV/PV.
In investments, most (if not all) annuities may be qualified as “Ordinary Annuities,” since their cash flows occur at the end of the relevant periods.
Other annuities are called “Annuities Due,” meaning that the CFs occur at the start of the relevant period s .
If, as in most cases, the cash flows do not qualify as an annuity, then their FV/ PV s may be derived only by calculating the FV/PV of each discrete CF and then aggregating.
This is the same process by which we shall derive the “short-cut” Annuity TVM factors.