What
is annuity?
Annuity is a regular guaranteed
payment offered by a financial institution (like insurance or bank). Annuity is
basically a contract between individual and financial institution in which
financial institution agrees to pay a guaranteed regular payment in future in
return of upfront payment. Annuity may allow payment in regular installments.
What
is Distribution?
The future payment made by
the financial institution is known as distributions. The distribution may be
received either by annuity holder or spouse of annuity holder according to term
of annuity.
What
are different types of annuities?
There are basically two
types of annuities i.e. immediate and deferred annuities. In immediate annuities
distribution starts immediately while in deferred annuities distributions start
at some future date (typically after 10 or 15 years).
What
is present value of annuity?
Present value of future
cash flow is calculated by applying some discount factor. It means what is the
current value regular guaranteed payment (Distributions) that has been guaranteed
by financial institution. This provides useful information to annuity holder
for making informed decision.
How
present value of annuity is calculated?
Present value of annuity is
calculated by multiplying annuity factor with the regular guaranteed payment
(Distributions), the annuity factor can be found by using the annuity table or
may also be calculated by the following formula.
What
is formula of annuity Factor?
The annuity factor may be
calculated by the following formula
1-(1+i)-n
i
I= Discount Rate
n= Number of Distribution (in
years)
