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| Subject:
present value questions
Category: Business and Money Asked by: kristee-ga List Price: $2.00 |
Posted:
05 Jul 2005 08:19 PDT
Expires: 05 Jul 2005 12:02 PDT Question ID: 540103 |
Why is the present value of an annuity due equal to (1 + r) times the present value of an ordinary annuity? Why is the future value of an annuity due equal to (1 + r) times the future value of an ordinary annuity? |
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| Subject:
Re: present value questions
From: jonnyc607-ga on 05 Jul 2005 09:23 PDT |
The present value of an ordinary annuity has discounted the Future value one extra period (compared to an annuity due) because payments are made at the END of the period. The first year of an annuity due, however, does not need to be discounted because the payment is made at the beginning of the year. In order to change the PV ordinary annuity to a PV annuity due, we have to account for this difference in payments. We add back the first year's worth of discounting, which is determined by: PV ordinary annuity * (1+r) and this will give you the PV annuity due |
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