An annuity is any type of investment or payout where either an investor pays money at set intervals or receives money at set intervals. For example, an investor deposits £650 in a bank account one time each year, and he wants to know how much money he will have in 20 years when factoring in interest. The annuity factor is the number the investor must multiply his deposit amount by to determine the future value of the annuity.
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Determine the interest rate per compounding period and the number of times the annuity compounds. For example, an annuity compounds at 5 per cent interest per year for four years.
Add 1 to the number of times the annuity compounds. In the example, 1 plus 4 years equals 5.
Add 1 to the interest rate per compounding period. In our example, 1 plus 5 per cent equals 1.05.
Raise the number calculated in Step 3 to the power of the number calculated in Step 2. In our example, 1.05 raised to the power of 5 equals 1.276281563.
Subtract 1 from the number calculated in Step 4. In our example, 1.276281563 minus 1 equals 0.276281563.
Divide the number calculated in Step 5 by the interest rate per compounding period to determine the annuity factor. In our example, 1.276281563 divided by 0.05 equals 25.52563126. This is the annuity factor.
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