An annuity due might sound like some type of bill you have to pay, but it’s actually quite different. An annuity is any series of evenly spaced, equal cash flows that you pay or receive over a fixed period of time, such as a bond’s interest payments. The “due” part of an annuity due simply means the cash flows occur at the beginning of each period rather than at the end. You can calculate the future value of an annuity due to figure the accumulated value of all the cash flows at the end of the final payment period.
Multiply the number of the annuity due’s cash flows per year by the number of years of the annuity to determine the total number of payment periods. For example, assume you will deposit $250 into a savings account at the beginning of each month for five years and want to figure its value at the end of five years. Multiply 12 cash flows per year by five years to get 60 total payment periods.
Divide the annual interest rate the cash flows will earn by the number of cash flows per year to determine the periodic interest rate. In this example, assume the savings account pays 5 percent annual interest. Divide 5 percent, or 0.05, by 12 to get a 0.0042 periodic interest rate.
Add the periodic interest rate to 1. Raise your result to the Nth power, in which N represents the total payment periods. In this example, add 0.0042 to 1 to get 1.0042. Raise 1.0042 to the 60th power to get 1.286.
Subtract 1 from your result. Divide that result by the periodic interest rate. In this example, subtract 1 from 1.286 to get 0.286. Divide 0.286 by 0.0042 to get 68.095.
Multiply your result by the periodic payment. Continuing the example, multiply 68.095 by $250 to get $17,023.75.
Add the periodic interest rate to 1 and multiply your result by your Step 5 result to calculate the future value of the annuity due. Concluding the example, add 0.0042 to 1 to get 1.0042. Multiply 1.0042 by $17,023.75 to get a future value of $17,095.25. The $250 deposits at the beginning of each month will earn interest and accumulate to $17,095.25 in five years.
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