MEANING
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The term 'Annuity' is derived from a Latin word 'annum' and such it
as means annual payment of a fixed
amount.
But as a matter of practice, it means any
periodical payment of a fixed amount made at a regular
interval, such as, one year, half year,
quarter, or a month, to discharge any obligation under a contract
reckoning compound interest at a certain rate.
The person obliged to make such payments is called Annuitor', the person entitled to receive such
payments is called $Annuitant or Annuity Holder'.
DEFINITION
ANNUITY : A series of equal payments made at equal intervals of time reconing compound interest at a
stipulated rate.
8.2 Annult
called the periodic or periodie
ic rent of
of annuity is
PERIODIC PAYMENT: The size of each
the annuity.
payment
an
month, then is annuity
it is
annuity win
For of R 1000 is made
on first of every with a
exanmple,
Deradpie, If aa series
If
p series of payment
periodic payment of R 1000.
dates of an annuity is called .
PAYMENT PERIOD : The time between two successive payment then t 1s an
annuity wi
t
payment period. For is made on first January
every year, with
example,
mple, If payments
If payments
payment period of
payment period of one year.
called its terim or duration.
*NDURATION: The total time far which on annuity is to continue is
Fo from 2000 to 2009, it is
If aseries of payments is made on 1st January every year an
upie,
annuity with a 10 years term or duration.
and the interest earned
VALUE OR AMOUNT of all the payments made on
them atO
: It is the sum
the end of the term of the
annuity.
In otherwords, the amount of an annuity is the sum of the Terminal Values' of each of the periodic
payments.
The word Terminal Value means the sum of the pavments made and the interest earned on it.
CAPTTAL VALUE OR PRESENT VALUE : The present value of an annuity is the sum total of the
present worth of the different instalments.
n otherwords, it is the amount of money that must be invested now to purchase the payments due in
future (i.e. instalments due).
TYPES OF ANNUTIES
are different types of annuities he classified on the basis of their termS Or on the basisof
ese which may
payment interval (period).
ANNUITIES CLASSIFIED ON THE BASIS OF THEIR TERMS
(A) ANNUITY CERTAIN: An annuity certain is an annuity which begins and ends on certain tined
dates.
Example : Hire purchase of T.v., Computers etc. and Bank recurring deposits.
(B) cONTINGENT ANNUITY : An annuity whose payments continue for a period of time, whic
depends on the happening of a contingent event (the date of happening of which can not be fore told) iscalet
Contingent Annuity.
Example: Life insurance premium is paid annually and stops if the insured person dies, ie. theterm ofths
annuity depends on the contingent event of death of theinsured.
Anudty
ANNUITY OR Y 8.3
PERPETUAL
to c o m e ,
is PERPETUITY
called perpetual annuity.
: An
annuity, whose payments
,all times
allbeginning yments are
are continued forever,
ra g date continuce
i n
f o r
a l l
1he date of the perpetual annuity is known but
annuity is infinite. terminal (end) date is not
a mo f
this his known, because tne
Tn
Endowment funds or Prize Funds the
principal amount is not touched but the
E x a m p l e
N velfare (prize) purposes. So they are
used for perpetual annuities. interest earned
NUITIESC
CLASSIFIED ON THE BASIS OF
, (A) HMEDIATE ANNUITY : It is the
PAYMENT PERIOD
ments can
first day or
be made on on last
annuity in which
payments are started without delay.
day of the period. These
This type may be classifie as following:
Ordinary or Annuity Due: An annuity in which
a
the first payment is made
nd.second payment is made at the end of second
period at the end of first
payment
annuity due. payment period and so on, is called as on ordinary or
In other words, when the periodic
payments under an
annuity are made at the end of each
fhe annuity 1s said tO be an immediate annuity. payment period,
Note:
e An
ordinary annuity is annuity certain but the converse
may not be true.
Example: A personal loan from bank.
(2) Annuity Prepaid : It is an annuity in which the
period. This type of annuity is not usual. payments are made at the beginning of each
payment
Example : Mrs. Minali makes an annuity contract with
which she has to receive 2500 by paying50,000 in 2000 in consideration of
annually for twenty years from 2001.
Annuity Prepaid Annuity Due
lst Payment 1st January, 2001
31st December, 2001
2nd Payment 1st January, 2002
*** 31st December, 2002
** *
****
20th Payment 1st January, 2020 31st December, 2020
Note If nothing is mentioned regarding nature of an
due. annuity, then it is to be taken as
Ordinary or Annuity
(3)Deferred Annuity: Deferred means postponed. A deferred
annuity is an annuity in which the first
payment is deferred (postponed) for a period of time equivalent to a certain
number of payment
Note: In deferred annuity the term begins after the expiry of certain time periods.
period called the deferment period.
AMOI
