Also… how will I know if that is ordinary or due after finding out that it’s a maturity or present value problem?
Topic in Math of Investment (Annuity): How will know if the question is asking for the maturity or present val
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Serge M
May 4, 2010 at 8:05 pm
The question has to be carefully worded and requires careful reading. You have to ask yourself:
1. Is the money available now and will be distributed in equal payments over a period of time? If the answer is YES, the principal is the present value and there is no future value
2. Is the money available in the future and will be accumulated through equal periodic distributions or payments? If the answer is YES, you have the future value of an annuity.
Then you have to determine if the periodic payments start at the beginning or the end of a period. For an ordinary annuity, all payments occur at the END of each period:
PV—-1—-2—-3—-4
—-1—-2—-3—-4 FV
For an annuity due the payments occur at the beginning of the period:
PV 1—-2—-3—-4
For a deferred annuity the FV is computed one period after the last payment:
—-1—-2—-3—-4—-FV
Drawing a diagram of the problem can be very helpful in deciding how to solve it.