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What is the difference between the present value of an annuity and the future value of an annuity?

A:

The register value of an annuity represents the sum that must be invested now to guarantee a desired payment in the time to come, while the future value of an annuity is the amount to which current investments disposition grow over time.

What Is an Annuity?

Though often associated with a express insurance-related product, an annuity is any asset that generates regular payments for a set ever period. This type of investment is often used by those preparing for retirement or for a term of planned unemployment. Depending on the types of investments used, annuities may cause either fixed or variable returns.

Both the present and future value figures assume a regular annuity with a fixed growth rate. Scads online calculators determine both the present and future value of an annuity, disposed the interest rate, payment amount and duration.

Present Value of an Annuity

The allowance value of an annuity is simply the current value of all the income generated by that investment in the days – or, in more practical terms, the amount of money that would call to be invested today to generate consistent income down the road. Using the hold rate, desired payment amount and number of payments, the present value discretion discounts the value of future payments to determine the contribution necessary to complete and maintain fixed payments for a set time period.

For example, the present-value method would be used to determine how much to invest now if you want to guarantee monthly payments of $1,000 for the next 10 years.

Approaching Value of an Annuity

The future value of an annuity represents the amount of shin-plasters that will be accrued by making consistent investments over a set years, assuming compound interest. Rather than planning for a guaranteed amount of proceeds in the future by calculating how much must be invested now, this formula appraisals the growth of savings, given a fixed rate of investment for a given amount of circumstance.

The future-value calculation would be used to estimate the balance of an investment account, subsuming interest growth, after making monthly $1,000 contributions for 10 years.

See also For what typewrites of financial instruments would I want to calculate the present value of an annuity?

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