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EXAM FM/2 REVIEW ANNUITIES
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Exam FM/2 Review Annuities

Feb 08, 2016

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Exam FM/2 Review Annuities. Basics. Annuities are streams of payments, in our case for a specified length Boil down to geometric series. Two main formulas. For annuities due (double dots), simply change denominator from i to d Once again, if unsure make a TIMELINE. Deferred Annuities. - PowerPoint PPT Presentation
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Page 1: Exam FM/2 Review Annuities

EXAM FM/2 REVIEWANNUITIES

Page 2: Exam FM/2 Review Annuities

Basics Annuities are streams of payments, in our case for a

specified length Boil down to geometric series

Page 3: Exam FM/2 Review Annuities

Two main formulas

For annuities due (double dots), simply change denominator from i to d

Once again, if unsure make a TIMELINE

π‘Žπ‘› =Ϋ€ 𝑣+ 𝑣2 + β‹―+ 𝑣𝑛 = 1βˆ’ 𝑣𝑛𝑖

𝑠𝑛 =Ϋ€ (1+ 𝑖)π‘›βˆ’1 + β‹―+ሺ1+ π‘–αˆ»+ 1 = (1+ 𝑖)𝑛 βˆ’ 1𝑖

π‘ αˆ·π‘› =Ϋ€ (1+ 𝑖)𝑠𝑛 𝑠𝑛+1=Ϋ€ βˆ’Ϋ€ 1 π‘Žαˆ·π‘› =Ϋ€ (1+ 𝑖)π‘Žπ‘› π‘Žπ‘›βˆ’1+1=Ϋ€ Ϋ€

Page 4: Exam FM/2 Review Annuities

Deferred Annuities Annuity with the whole series of payments pushed

back

No need to know formulas, just use TVM factors to shift

Page 5: Exam FM/2 Review Annuities

Perpetuities No new formulas, just plug in infinity for n in the

originals

Interestingly, this leads to

π‘Žβˆž =Ϋ€ 1𝑖 π‘Žαˆ·βˆž =Ϋ€ 1𝑑

1π‘‘βˆ’ 1𝑖 = 1

Page 6: Exam FM/2 Review Annuities

Annuities with off payments Two Cases, assuming i is effective

rate…find the effective rate per payment 1. Multiple Interest periods per payment

2. Multiple payments during interest period

Or you may need to use annuity symbols

Page 7: Exam FM/2 Review Annuities

More Annuities If payable continuously, continue pattern and change i to Ξ΄

Double dots and upper m’s cancel

If payments vary continuously and/or interest varies continuously (unlikely)

Page 8: Exam FM/2 Review Annuities

Arithmetic progression General formula – Present value where P is the first payment

and Q is the common difference between payments.

From these, you can derive all 4 increasing/decreasing formulas (show)

𝐴= π‘ƒπ‘Žπ‘› +Ϋ€ 𝑄(π‘Žπ‘› βˆ’Ϋ€ 𝑛𝑣𝑛)𝑖

Page 9: Exam FM/2 Review Annuities

Calculator Highlights Beg/End option Always clear TVM values and check beg/end,

compounding, etc options

Page 10: Exam FM/2 Review Annuities

Problems Susan and Jeff each make deposits of 100 at the end

of each year for 40 years. Starting at the end of the 41st year, Susan makes annual withdrawals of X for 15 years and Jeff makes annual withdrawals of Y for 15 years. Both funds have a balance of 0 after the last withdrawal. Susan’s fund earns 8% annual effective. Jeff’s fund earns 10% annual effective. Calculate Y-X

ASM p.109

Answer: 2792

Page 11: Exam FM/2 Review Annuities

To accumulate 8000 at the end of 3n years, deposits of 98 are made at the end of each of the first n years and 196 at the end of each of the next 2n years.The annual effective rate of interest is i. You are given (1+i)^n=2.0Determine i. ASM p.123

Answer: 12.25%

Page 12: Exam FM/2 Review Annuities

At an effective interest rate i, i>0, both of the following annuities have the same present value X: A 20-year annuity immediate with annual payments of 55 A 30-year annuity immediate with annual payments that pays

30 per year for the first 10 years, 60 per year for the next 10 years, and 90 per year for the final 10 years

Calculate X ASM p.136

Answer: 575

Page 13: Exam FM/2 Review Annuities

Kathryn deposits $100 into an account at the beginning of each 4-year period for 40 years. The account credits interest at an annual effective interest rate of i. The accumulated amount in the account at the end of 40 years is X, which is 5 times the accumulated amount in the account at the end of 20 years. Calculate X. ASM p.165

Answer: 6,195

Page 14: Exam FM/2 Review Annuities

A perpetuity costs 77.1 and makes annual payments at the end of the year. The perpetuity pays 1 at the end of year 2, 2 at the end of year 3, … , n at the end of year (n+1). After year (n+1), the payments remain constant at n. The annual effective interest rate is 10.5%. Calculate n. ASM p.205

Answer: 19

Page 15: Exam FM/2 Review Annuities

A perpetuity-immediate pays 100 per year. Immediately after the fifth payment, the perpetuity is exchanged for a 25-year annuity-immediate that will pay X at the end of the first year. Each subsequent annual payment will be 8% greater than the preceding payment. Immediately after the 10th payment of the 25-year annuity, the annuity will be exchanged for a perpetuity-immediate paying Y per year. The annual effective rate of interest is 8%. Calculate Y. ASM p.228

Answer: 130