Definitions

Annuity

An annuity is a series of regular cash payments over a certain period. For example, a mortgage or a car loan is an annuity. An investment that pays you regular dividends is also an annuity. Most of the functions we will be covering in this chapter are known as annuity functions.

PV (Present Value)

This is the present value of an investment based on a constant growth rate. It is the lump-sum amount that a series of future payments is worth right now.

FV (Future Value)

This is the future value of an investment based on a constant rate of growth. For example, let’s say you want to save $25,000 to pay for a project in 20 years, hence, $25,000 is the future value. To calculate how much you need to save monthly, you’ll also need to factor in an assumed interest rate over the period.

PMT (Payment)

This is the payment made for each period in the annuity. Usually, the payment includes the principal plus interest without any other fees, and it is set over the life of the annuity. For example, a $100,000 mortgage over 25 years at 3% interest would have monthly payments of $474. You would enter -474 into the formula as the pmt .

RATE

This is the interest rate per period. For example, if you get a loan at a 6% annual interest rate and make monthly payments, your interest rate per month would be 6%/12.

NPER (Number of periods)

This is the total number of payment periods in the life of the annuity i.e. the term. For example, if you get a 3-year loan and make monthly payments, your loan would have 3*12 periods. Hence, you would enter 3*12 into the formula for the nper argument.

Note : The FA, PV, and PMT arguments can be positive or negative values depending on whether you are paying out money or receiving money. If you are paying out money, then the figures will be negative; if you are receiving money then the figures will be positive.