Annuities
Payments show up everywhere. For example, you make payments on bank loans or you make payments into your RRSP. An annuity is anything where you make regularly scheduled payments. Here are some real-world examples of annuities.
- Last week you completed the purchase of your $150,000 starter home and finished all of the paperwork on your mortgage with the bank. You snagged a great mortgage rate of 5% compounded semi-annually, locking it in for a five-year term with monthly payments of $872.41 (for the next 25 years) starting one month after you move in.
- You excitedly cruise to the Honda dealership to pick up your new $22,475 Honda Civic Sport, on which you have a four-year lease. Pulling out your iPhone (for which you pay $60 monthly), you ensure that you have enough funds in your chequing account to make the $2,000 down payment today along with the first of your $242.16 monthly lease payments at 2.9% compounded monthly.
- Driving away in your Civic, you stop in at Sleep Country Canada and purchase a queen size mattress for your new bedroom. You recall a TV ad promoting an $895 Sealy mattress plus 12% taxes with no money down and 12 easy, interest-free monthly payments of $83.53. It will be nice to have a comfortable bed to sleep in!
This chapter explores the concept of making regular payments toward savings goals or debt extinguishment. First, it introduces key payment concepts and reviews different types of payment plans. You will then calculate the future and present value of a stream of payments. You extend the application of the concepts further to solve for other variables such as the payment amount, the term, and the nominal interest rate.
Attribution
“Chapter 11 Introduction” from Business Math: A Step-by-Step Handbook Abridged by Sanja Krajisnik; Carol Leppinen; and Jelena Loncar-Vines is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
“Chapter 11 Introduction” from Business Math: A Step-by-Step Handbook (2021B) by J. Olivier and Lyryx Learning Inc. through a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License unless otherwise noted.
