Definition for : Annuity

An annuity is the cash paid out annually for Debt reimbursement and Interest accrued. A constant annuity means the part of the Debt in each annual payment increases, but the Interest part decreases, so that the total amount remains the same over the Life of the loan. The Value of a constant annuity can be calculated as follows: PV = F x [1/k – 1/(k x (1+k)n)], where F is the annuity, k – the Discounting rate, n – Duration of the investments. If the annuity grows with the constant rate g for n years, its Value is then equal to:PV = F0 x [(1+g)/(k-g)] x [1 – (1+g)n/(1+k)n], where F0 is the first annuity.

(See Chapters Chapter 16 The time value of money and net present value and Chapter 17 The internal rate of return of the Vernimmen)

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