How to Differentiate between, present, compound and future annuities. (1 Viewer)

[WorryWartCob]

enough said :/

 

[breeee]

i suck at it too, but in a lot of the past papers it specifies which one to use lol! And they're all on the formula sheet right?

 

[SpreadTheWord]

Present- Usually has 'takes out' The look at the context of the sentence, and the way it is written. So, Jake needs $250000 at the end of 6 years, how much should he put in to achieve this goal. A really basic one, but as you can see the 'how much should he put in' indicates that a present is required. Compound - it usually asks how much would this come too. Im not great on this part, but this is how i differentiate between.

I hope i have been of some assistance. Also, good luck for your exam tommorrow.

 

[present_value]

It's easy. I am doing them in finance right now at university. Studying for my exam on saturday. But I am sorry, your exam is tommorow , you wont learn by then. You fail.

 

[present_value]

Present- Usually has 'takes out' The look at the context of the sentence, and the way it is written. So, Jake needs $250000 at the end of 6 years, how much should he put in to achieve this goal. A really basic one, but as you can see the 'how much should he put in' indicates that a present is required. Compound - it usually asks how much would this come too. Im not great on this part, but this is how i differentiate between.

I hope i have been of some assistance. Also, good luck for your exam tommorrow.

This guy is way off. Don't listen to him, he is a retard.

 

[SpreadTheWord]

This guy is way off. Don't listen to him, he is a retard.

Obviously mate.

 

[marmsie]

The difference between a straight compound interest question and an annuity (future value) can be very subtle if they don't specify.

Compound Interest Wording:
Bob invests $1000 for 10 years at 5% p.a. compounding annually. How much does he have at the end of the investment?

Future Value Wording:
Bob invests $1000 every year, for 10 years at 5% p.a. compounding annually. How much does he have at the end of the investment?

It is the continual investing of money that separates straight compound interest and future value annuities.

Spotting when to use the Present Value Formula is not as easy to define because there are a number of ways it can be worded. Apart from the "take out" example mentioned already, other wordings could be along the lines of comparing a single large compound interest investment to the on-going smaller annuity investments e.g.:

"What lump sum can be invested now that will return the same amount as investing $M every year/month/week/etc ..." and it goes on to describe the details of the annuity.

The present value formula can also be used in loan repayment questions (reducing something loans, can't remember the exact term). You can use the formula to work out what the repayments should be to pay off a loan in the required time, for these questions though, the amount borrowed represents the present value ($N) and you are usually required to calculate $M (so some rearranging needs to be done).

Hopefully you, or at least somebody whom this helps, reads this before the exam and good luck in your exam today.