Section 5.3

Annuities

A sequence of payments or withdrawals made to or from an account at regular time intervals is called an annuity. The term of the annuity is length of time over which the payments or withdrawals are made. There are several different types of annuities. An annuity whose term is fixed is called an annuity certain. An annuity that begins at a definite date but extends indefinitely is called a perpetuity. If an annuities term is not fixed, it is called a contingent annuity. Annuities that are created to fund a purchase at a later date like some equipment or a college education are called sinking funds.

The payments for an annuity may be made at the beginning or end of the payment period. In an ordinary annuity, the payments are made at the end of the payment period. If the payment is made at the beginning of the payment period, it is called an annuity due. In this text we’ll only examine annuities in which the payment period coincides with the interest conversion period. This type of annuity is called a simple annuity.


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