Annuity Loan Calculator : Making Calculations SimpleAn annuity is a contract between an individual and a life insurance company. The money that is loaned to the life insurance company continues to grow on a tax-deferred basis. Eventually it will be distributed back to the investor or owner in one of several ways. What makes an annuity unique is the option for a guaranteed distribution of income until the death or the person or persons covered. When working with questions on annuity investments it is sometimes good to think of them as a variation on a loan. With a loan you make payments that reduce the principal plus the accumulated interest. With an annuity the money moves in two directions. Initially the money is received (or deposited) as the loan is made. Then at a predetermined point the loan plus the interest is paid back. In order to determine the present value of an annuity loan, a formula must be applied. If you happen like math and the challenge of replacing letters with dollar amounts in the formula you can be your own Annuity Loan Calculator. The formula needed is: A=P/i [1-(1+i)^-N] where A = present value of annuity P = Payment amount i = interest rate N = number of payments If this formula looks familiar it is because it is the formula for determining an original loan amount. In this case the original loan amount is also called the present value of an annuity. A far simpler method of working with a Annuity Loan Calculator is to invest in a Texas Instrument TI83. Once a few fairly easy steps are mastered you will be able to use this calculator as a financial calculator and solve all your annuity loan questions. For the initial setup determine how many decimal places you need to display. Default is two and that is not nearly enough for annuity loan formulas. To change the display press MODE and then the down arrow key one (to the float line). Next use the right arrow key to highlight the 5 and press ENTER. Press 2nd MODE to exit the menu and your calculator is ready to go. As in the above formula for present value of an annuity you will need to replace the letters with dollar figures. Place your TI 83 into the TVM Solver mode by pressing 2nd X^-1 and ENTER. Choose the Finance menu, and then choose TVM Solver. Your screen should look like the table below: N 1/% PV PMT FV P/Y C/Y Here you would enter 10 into N for the number of years to be paid. Enter the percentage you would earn on similar investments in 1/% and the total amount of the investment/loan into PMT. Enter 0 into FV and move to the PV line. Press ALPHA ENTER and you will have the amount you would have to pay (cash outflow) today to purchase this annuity. |