Annunities

Objectives: Calculate the future value of an ordinary annuity. Calculate the amount of interest earned in an ordinary annuity. Calculate the total contributions to an ordinary annuity. Calculate monthly payments that will produce a given future value.

Vocabulary: ordinary annuity simple annuity Christmas club tax-deferred annuity sinking fund present value of an annuity	Formulas: Ordinary Annuity Formula: Present Value of Annuity Formula:

Possible Classroom Examples:

Find the future value of an ordinary annuity with $150 monthly payments, interest, 12 year.
On March 19, Rachael Westlake joined a Christmas club. Her bank will automatically deduct $110 from her checking account at the end of each month, and deposit it into her Christmas club account, where it will earn interest. The account comes to term on December 1. Find the following:
- the future value of the account.
- Rachael’s total contribution to the account.
- the total interest

Art Dull recently set up a tax-deferred annuity to save for his retirement. He arranged to have $50 taken out of each of his biweekly checks; it will earn interest. He just had his thirtieth birthday, and his ordinary annuity comes to term when he is sixty-five. Find the following:

Susan and Bill Stamp want to set up a TDA that will generate sufficient interest at maturity to meet their living expenses, which they project to be $1,200 per month.

Find the amount needed at maturity to generate $1,200 per month interest if they can get interest compounded monthly.
Find the monthly payment they would have to put into an ordinary annuity to obtain the future value found in (a) if their money earns and the term is 25 years.

Beth’s daughter Katie will be a freshman in college in twelve years. To help cover her extra expenses, Beth decides to set up a sinking fund of $100,000. If the account pays 7.25% interest and she wants to make quarterly payments, find the size of each payment.