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Annuities

Annuities. DO NOW…. Anthony Aruta deposited $800 in a savings account earning 6 percent interest compounded quarterly. If he makes no other deposits or withdrawals, how much will his money earn in 2 years?.

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Annuities

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  1. Annuities

  2. DO NOW… Anthony Aruta deposited $800 in a savings account earning 6 percent interest compounded quarterly. If he makes no other deposits or withdrawals, how much will his money earn in 2 years? Use the Compound Interest Amount of $1.00 Table on page 37. How much interest did his money earn?

  3. DO NOW… Step 1Find the Total Interest Periods per year X number of years 4 Quarters per yr. X 2 year = 8 • Step 2 Find the interest rate per period Annual Rate / number of period • 6% = 1.50%4

  4. Step 3 Find the amount of $1.00 for 8 periods at 1.50% using your table on page 37. = 1.12649 $800 X 1.12649 = $901.19

  5. Annuities ORDINARY ANNUITY – Occurs when equal deposits are made at the end of each Interest period(such as salaries) Financial advisors recommend their clients make regular deposits in a savings plan, such as an individual Retirement Account (IRA). When an equal amount of money is deposited into an account at equal periods of time, this is called an ANNUITY. (Two categories of annuities) ANNUITY DUE - Occurs when you have regular deposits at the beginning of the period (such as rent). The money immediately starts earning interest because it is deposited at the beginning of the interest period.

  6. Annuities (cont.) Lets Do an Example How do we calculate the interest on a series of equal payments over regular intervals of time? Both annuity groups use the future value. This is the amount of money in the annuity account at the end of the a specific period of time. Step 1: Find the total number of periods X by the total # of years Step 2:Find the interest rate per period. Annual Rate Number of Periods per year Step 3: Find the Future Value for set period using your table Step 4: Find the Future Value. Amount of Deposit X Future Value of $1.00

  7. Lets Practice Mark Smith deposits $500 in an ordinary annuity at the end of each quarter in an account earning 6 percentinterest compounded quarterly. What is the future value of the account in 2 years? Step 1: Find the total number of periods X by the total # of years Step 2:Find the interest rate per period. Annual Rate Number of Periods per year Step 3: Find the Future Value for 8 periods at 1.5%, using your table on page 38. Step 4: Find the Future Value Deposit X Future Value of $1.00 4 X 2 = 8 6%= 1.5 4 $500 X 8.43284= $4,216.42 FV

  8. Annuity Due Step 1. You know from previous example that the future value of the ordinary annuity is $4,216.42 Step 2. You also know that the rate per period is 1.5 percent. = 0.015 Step 3. Use the calculation for future value of an annuity due. Fut. Val. of an Ordinary Annuity X ($1.00 + Rate Per Period) ANNUITY DUE - Occurs when you have regular deposits at the beginning of the period (such as rent). The money immediately starts earning interest because it is deposited at the beginning of the interest period. $4,216.42 X (1.00 + 0.015)= $ 4,216.42 X 1.015 = $4,279.67 future value of an annuity due

  9. Class Assignment In your workbooks, Turn to Sections 5-8, on Page 38 Complete questions 1 - 5 t 9

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