Present Value Of An Annuity


DEFINITION of 'Present Value Of An Annuity'

The current value of a set of cash flows in the future, given a specified rate of return or discount rate. The future cash flows of the annuity are discounted at the discount rate, and the higher the discount rate, the lower the present value of the annuity.

Present Value Of An Annuity

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

This calculates the present value of an ordinary annuity. To calculate the present value of an annuity due, multiply the result by (1+i). (The payments start at time zero instead of one period into the future.)


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BREAKING DOWN 'Present Value Of An Annuity'

The essence of this concept is that receiving money now is worth more than receiving the same amount in the future. By the same logic, receiving $5,000 today is worth more than getting $1,000 per year for five years. This is because if you got the lump sum today, you could invest it and receive an additional return.

Using this example, and assuming a discount rate of 6%, the present value of an annuity that pays $1,000 per year for five years is $4,212 (1,000*[1-(1+0.06)-5/0.06]= 4,212). This means that if you could get a return on your invested funds of 6% per year, receiving $4,212 today would have the same value to you as receiving $1,000 per year for five years.

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  4. Present Value - PV

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  5. Future Value - FV

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  6. Time Value of Money - TVM

    The idea that money available at the present time is worth more ...
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  1. How liquid are variable annuities?

    Variable deferred annuities and variable immediate annuities are not considered liquid. Variable deferred annuities carry ... Read Full Answer >>
  2. Do variable annuities have RMDs?

    Variable annuities are not subject to required minimum distributions (RMDs) unless they are held in qualified plans, such ... Read Full Answer >>
  3. Can variable annuities be rolled into an IRA?

    Variable annuities are often found in government or nonprofit employer retirement plans such as 403(b) or 457(b) plans. With ... Read Full Answer >>
  4. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
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    Whether your variable annuity is protected from creditors depends on the state in which you live. About three-quarters of ... Read Full Answer >>
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    Variable annuities are tax-deferred. This means an investor does not pay taxes on the interest income from his annuity until ... Read Full Answer >>

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