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Ordinary General Annuities

Objectives

Compute the future value (or accumulated


value) for ordinary general annuities.
Compute the present value (or discounted
value) for ordinary general annuities.
Compute the payment, number of periods,
and interest rate for ordinary general
annuities.
General Annuity
Length of interest conversion period is
different from the length of the payment
interval.
Home mortgages are usually compounded
semi-annually and payments are often made
on a monthly, semi-monthly, or weekly
basis.
Ordinary General Annuity
Relationship between Payment
Interval and Interest Conversion
Period
Two Cases-Ordinary General
Annuities
Determining the value of c
Effective Rate of Interest per
Payment Period
Depending on the length of the payment
interval, the effective interest rate per payment
period may be a monthly, quarterly, semi-
annual, or annual rate.
c
p = (1+i) - 1
Calculating Effective Rate p
Formula for the Future Value
of an Ordinary General
Annuity
Finding FV or Accumulated Value
Find the Future Value Using
the Future Value Formula
Present Value of Ordinary
General Annuity
n
PVnc = PMT 1 - (1 + p)
p

c
where p =(1+i) - 1
Finding PV of an Annuity
Calculating PV
Using a Preprogrammed
Calculator to Find PV or FV of
an Ordinary General Annuity
Finding PMT When the Future
Value Is Known
n
FVnc = PMT (1 + p) - 1
p

Divide both sides by the coefficient of PMT.

PMT = FVnc p
n
(1+p) -1
Find PMT Using the Electronic
Calculator
When using a preprogrammed finance
calculator, you can find PMT by entering 5
known values (FV, N, I/Y, P/Y, C/Y) and
pressing CPT PMT.

Recall that the PMT value will be negative as


payments are considered to be cash outflows.
Finding PMT When Present
Value Is Known
n
PVnc = PMT 1 (1 + p)
p

Divide both sides by the coefficient of PMT.

PMT = PVncp
-n
1 (1+p)
Finding i
Summary
In an ordinary general annuity, the payment
interval and interest conversion interval do
not coincide.(i.e. General)
It is necessary to calculate an equivalent
rate of interest so that the payment interval
and interest conversion interval do coincide.