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Annuities

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3.2 Annuities (EMCFY)

Annuity

A number of equal payments made at regular intervals for a certain amount of time. An annuity is subject to a rate of interest.

  • Future value annuity - regular equal deposits/payments are made into a savings account or investment fund to provide an accumulated amount at the end of the time period. The amount accumulating in the fund earns compound interest at a certain rate.
  • Present value annuity - regular equal payments/installments are made to pay back a loan or bond over a given time period. The reducing balance of the loan is usually charged compound interest at a certain rate.

For investment funds, pension funds, loan repayments, mortgage bonds (home loan) and other types of annuities, payments are typically made each month. To “default” on a payment means that a payment for a certain month was not paid. The period of an investment is also referred to as the term of an investment.