What does it mean if the investment sales literature states that the future fund value of an ordinary annuity is determined using the simple interest formula method? Explain what this means and also illustrate this by devising a calculation. (Assume that you have 20 years until you retire).
What is the difference of a between an ordinary annuity and an annuity due? Compare the annuity due to the money you invested in the ordinary annuity. Illustrate this by devising a calculation. (Assume that you have 20 years until you retire). (Use the variables you created for the simple interest formula method).
Using a formula, calculate the present value of this ordinary annuity.
Part 1: Future value of annuity
Generally, interest can be calculated using simple interest formula.
The simple interest, I, for t years on an amount of P dollars at a rate of interest r per year for t years is:
I = Interest
P = Principal
r = Interest rate expressed as a decimal
t = Time.
Assuming interest compounded annually, the future value or maturity value, A, of P dollars for t years at a rate of interest of r per year is
A = P(1 + rt).
But this is considering only one payment. For annuity, we have yearly payment. The future value of this annuity can be calculated using the following formula:
FV= Future value of ...
The solution provides very detailed explanations and step-by-step calculations.