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Annuity
Definition
A series of equal payments made at regular intervals over a fixed period.
How It Works
PV of an ordinary annuity = PMT × [(1 - (1+r)^-n) / r]. Annuity due shifts all payments one period earlier.
Formula
PV = PMT × [(1 - (1+r)^{-n}) / r]
Example
A $1,000 annual payment for 5 years at 8% has PV = $1,000 × 3.9927 = $3,992.71.
Common Misconceptions
- ✗Annuities last forever (that is a perpetuity)
- ✗Annuity due and ordinary annuity have the same PV
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Common questions about Annuity
An annuity has a fixed number of payments. A perpetuity pays forever.
An annuity where payments occur at the beginning of each period instead of the end. Its present value equals the ordinary annuity PV multiplied by (1+r), making it worth more because each payment arrives one period sooner.
More Glossary Terms
📉 Discount Rate🧮 Net Present Value (NPV)🎯 Internal Rate of Return (IRR)⚖️ Weighted Average Cost of Capital (WACC)📈 Beta (β)📊 Capital Asset Pricing Model (CAPM)🛡️ Risk-Free Rate💹 Market Risk Premium💲 Cost of Equity🏦 Cost of Debt♾️ Terminal Value💸 Free Cash Flow🏢 Enterprise Value🚧 Hurdle Rate🔁 Annuity♾️ Perpetuity💵 Yield to Maturity (YTM)✂️ Coupon Rate📅 Amortization🔍 Sensitivity Analysis