Future Value Of An Annuity

AAA

DEFINITION of 'Future Value Of An Annuity'

The value of a group of payments at a specified date in the future. These payments are known as an annuity, or set of cash flows. The future value of an annuity measures how much you would have in the future given a specified rate of return or discount rate. The future cash flows of the annuity grow at the discount rate, and the higher the discount rate, the higher the future value of the annuity.

This calculation is useful for determining the actual cost of an annuity to the issuer:

Future Value Of An Annuity


C = Cash flow per period
i = Interest rate
n = Number of payments

This calculates the future value of an ordinary annuity. To calculate the future value of an annuity due, multiply the result by (1+i). (Payments start immediately instead of one period into the future.)

INVESTOPEDIA EXPLAINS 'Future Value Of An Annuity'

The basis is that providing a lump sum of $5,000 today costs more than providing a cash flow of $1,000 per year for five years. This is because if you provide the lump sum today, you could have invested it and received an additional return.

Using this example, and assuming a discount rate of 6%, the future value of an annuity that pays $1,000 per year for five years is $4,212 (1,000*[(1+0.06)5-1/0.06]=5,637). This means that if you could get a return on your invested funds of 6% per year, providing an annuity of $1,000 per year would be worth $637 ($5,637-$5,000) more to the issuer than giving a lump sum.

RELATED TERMS
  1. Discount Rate

    The interest rate charged to commercial banks and other depository ...
  2. Dedication Strategy

    A method by which the anticipated returns on an investment portfolio ...
  3. Annuity Table

    A method for determining the present value of a structured series ...
  4. Present Value Interest Factor - ...

    A factor that can be used to simplify the calculation for finding ...
  5. Annuity

    A financial product sold by financial institutions that is designed ...
  6. Annuity Due

    An annuity whose payment is to be made immediately, rather than ...
Related Articles
  1. Calculating The Present And Future Value ...
    Investing Basics

    Calculating The Present And Future Value ...

  2. Understanding The Time Value Of Money
    Investing Basics

    Understanding The Time Value Of Money

  3. An Overview Of Annuities
    Home & Auto

    An Overview Of Annuities

  4. Selecting The Payout On Your Annuity
    Options & Futures

    Selecting The Payout On Your Annuity

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center