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Annuities and Sinking Funds

Annuity. Ordinary annuity: a fixed (or escalating ) investment usually every month for a certain fixed period

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Annuities and Sinking Funds

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    1. Annuities and Sinking Funds 12.4.1

    2. Annuity Ordinary annuity: a fixed (or escalating ) investment usually every month for a certain fixed period – often until the age of 65yrs, FV = Future Value FV ( Ordinary): the amount is invested at the end of each month. FV (Annuity due): the amount is invested at the beginning of each month – receive more interest. Tax Deferred Annuity; deducted at source until retirement. Tax is calculated after the deduction, resulting in tax savings

    3. Sinking Funds This is an annuity that is invested for a specific purpose and is continued for a predefined period. Examples: Child’s college fund To buy a new computer in 3 years time.

    4. $ $ $ $ $ $ $ It is estimated that you will need R 600 000 for your child’s education in 10 years time, How much must you put away each year if you receive 10% interest pa.

    5. FV (ordinary annuity ) =

    6. How much would you need to invest each month to receive the same amount?

    7. FV ( annuity due) = FV (ordinary annuity) x

    8. FV ( annuity due)

    9. Bond Repayments To work out monthly bond repayments, the following formula is used.

    10. As this formula contains negative exponents , it may be re-arranged to give …..

    11. Bond Repayments To work out monthly bond repayments, the following formula is used.

    12. Bond Repayments

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