Present Value of Annuities | Exam FM | Financial Mathematics Lesson 12 - JK Math

[@stevegama8505]

Very helpful videos. I am currently studying for exam FM and I am using Coaching Actuaries and the videos are very confusing and do not provide an intuitive understanding of the material as much as I would like. I will be using these videos to intuitively understand all these topics. Thank you so much!

[@JKMath]

You’re welcome! That was my goal with these videos - to make learning the FM concepts more intuitive and provide a variety of examples throughout. Glad to know they are helpful for you. If you ever have any questions, please let me know! :)

[@napoliskey]

Dude, this is awesome, thanks!!

[@JKMath]

You’re welcome! Glad to help :)

[@abherumi]

Consider an annuity of payments of £1000 at the end of every second year What is the present value of this annuity if it runs for ten years and the interest rate is 7%? SIR PLX TELL ME WHICH ANNUITY IS THIS

[@JKMath]

First thing I would pay attention to is when the payments are being made. In your question I see from the wording that each payment is made at the END of each period. Therefore you know you are working with an annuity-immediate rather than an annuity-due. So far so good. Now, in your case the payments of 1000 are being made at the end of every SECOND year. This is important. What this means is that payments are not being made every single year for the 10 years that the annuity runs for. Instead, a payment is made every 2 years. So for the total of 10 years, if you make a payment every 2 years, then 10/2 = 5 total payments for this annuity. (n=5) Finally, you have the interest rate of 7%. Hard to tell from your wording, but if this is an annual effective rate, you cannot use this with the annuity notation since the payments are not made annually, but every two years. Therefore, if the 7% is an annual rate, I would recommend converting it into a two-year rate and then using the annuity notation to calculate the present value (I cover interest rate conversions in lesson 10). Remember, the frequency of the interest rate must match the frequency of the payment cycle in order to use the annuity notation/formula. Then, using n=5 and the converted interest rate, you should be able to find the PV. Hope this helps!