4/17/2020 IEB Wireframe

SECTION 3.2 Accumulated Value of an Ordinary Simple Annuity

The accumulated value S of an ordinary simple annuity is defined as the equivalent dated value of the set of
payments due at the end of the term, i.e., we choose a focal date = the date of the last payment. Below we
display an ordinary simple annuity on a time diagram with the interest period as the unit of measure.

We can calculate the accumulated value S by repeated application of the compound interest formula as shown in
the following example.

EXAMPLE 1Calculate the accumulated value of an ordinary simple annuity consisting of four quarterly
payments of $250 each if money is worth 6% per annum compounded quarterly.

Page 85

SolutionWe arrange the data on a time diagram below.

To obtain S we need to recognize the time value of money. That is, $250 paid at time 4 is not the same as $250
paid at time 1. We must write an equation of value using the end of the term (date of the last payment) as the
focal date. This gives

Now we develop a general formula for the accumulated value S of an ordinary simple annuity using the sum of a
geometric progression. Geometric progressions are dealt with in Appendix 2.

Let us consider an ordinary simple annuity of n payments of $1 each as shown on a time diagram below.

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 1/9
4/17/2020 IEB Wireframe

Let us denote the accumulated value of this annuity (read “s angle n at i”). Note that the symbol is the
accumulated value of the n payments of $1 using the date of the nth payment as the focal date. To obtain we
write an equation of value at the end of the term, accumulating each $1 payment to the date of the last payment.

The expression on the right side of the equal sign in the above equation is a geometric progression of n terms
whose first term is t1 = 1 and whose common ratio is r = (1 + i) > 1. Then, applying the formula for the sum of a
geometric progression, we obtain

The factor is called an accumulation factor for n payments, or the accumulated value of $1
per period.

Page 86

To obtain the accumulated value S of an ordinary simple annuity of n payments of $R each, we simply multiply
R by . Thus the basic formula for the accumulated value S of an ordinary simple annuity is

(10)

Applying (10) in Example 1 above, we calculate

CALCULATION TIP:

In this textbook we calculate the factor directly on a calculator using all the digits of the display
of the calculator to achieve the highest possible accuracy in our results.

EXAMPLE 2A couple deposits $500 every 3 months into a savings account that pays interest at j4 = 4%. They
made the first deposit on March 1, 2014. How much money will they have in the account just after they make
their deposit on September 1, 2018?

SolutionWe arrange the data on a time diagram below, noting that the first deposit is made on March 1, 2014
(designated as time 1). To assist in calculating the correct value of n, we determine the date that represents time
0, which is one interest period (one quarter-year) before the first deposit, or December 1, 2013.

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 2/9
4/17/2020 IEB Wireframe

The time elapsed from December 1, 2013, to September 1, 2018, is exactly 4 years 9 months, or n = 4.75 × 4 =
19 quarters. Thus we calculate the accumulated value S of an ordinary simple annuity of 19 payments of $500
each at j4 = 4% or i = 0.01 per quarter as

EXAMPLE 3You make deposits of $1500 every six months starting today into a fund that pays interest at j2 =
7%. How much do you have in your fund immediately after the 30th deposit?

Page 87

SolutionWe have R = 1500, n = 30, and i = 0.07/2 = 0.035 per half-year. Even though your first deposit is made
today, you have been asked to determine the accumulated value on the date of your 30th deposit, which makes
this an ordinary annuity. Thus,

EXAMPLE 4Scott invests $10 000 in a mutual fund. The fund pays interest at j1 = 8%. Scott takes the interest
from his mutual fund and deposits it in his bank account, which pays interest at j1 = 4%.

1. How much does Scott have in total at the end of 10 years?

2. How much would he have if both interest rates were j1 = 5%?

Solution aEach year the mutual fund pays out 8% of $10 000, or $800. Scott deposits the $800 into his bank
account at the end of every year. Thus, at the end of 10 years, Scott has his original $10 000 plus the
accumulated value of his bank account at i = 0.04.

Solution bEach year the mutual fund pays out 5% of $10 000 or $500. Thus,

Note that if both the mutual fund and the bank account pay interest at j1 = 5%, then we have the rather
interesting result of the question being a straightforward, chapter 2 compound interest problem:

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 3/9
4/17/2020 IEB Wireframe

Calculating the Periodic Payment

When equation (10) is solved for R, we obtain

as the periodic payment of an ordinary simple annuity whose accumulated value S is given. This result is
particularly useful for determining the deposit needed to achieve a future financial goal, as the next example
illustrates.

Page 88

EXAMPLE 5A man wants to accumulate a $200 000 retirement fund. He made the first deposit on March 1,
2014, and his plan calls for the last deposit to be made on September 1, 2035. Determine the size of each deposit
needed if

1. he makes the deposits semi-annually in a fund that pays 5% per annum compounded semi-annually.

2. he makes the deposits monthly in a fund that pays 5% per annum compounded monthly.

Solution aWe have S = 200 000 and i = 0.05/2 = 0.025 per half-year. We wish to determine R.

The first deposit is made on March 1, 2014 (designated as time 1). We need a date to represent time 0. It would
be one interest period (in this case 6 months) earlier, which is September 1, 2013. We then note September 1,
2013 to September 1, 2035 (date of final deposit) is exactly 22 years or n = 44 half-years.

Semi-annual deposits of $2546.07 will accumulate at j2 = 5% to $200 000 by September 1, 2035.

Solution bWe have S = 200 000 and i = 0.05/12 = 0.00416666 per month.

The date that would represent time 0 is one interest period (in this case 1 month) before March 1, 2014, which is
February 1, 2014. We then note February 1, 2014 to September 1, 2035 is exactly 21 years, 7 months. Thus n =
259 months.

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 4/9
4/17/2020 IEB Wireframe

Monthly deposits of $430.52 will accumulate at j12 = 5% to $200 000 by September 1, 2035.

Page 89

For some annuities, the interest rate may change over time. In other annuities, the periodic payment may change
after a certain period of time.

To calculate the accumulated value for these types of annuities, we can use the “blocking technique.” Every time
the interest rate changes, or every time the periodic payment changes, we can consider that to be a “block.” We
then accumulate that block of payments to the focal date. The final equation of value will be the sum of the
accumulated values of each block of payments.

Example 6 illustrates this method in a situation where the interest rate changes over time.

EXAMPLE 6Mrs. Simpson has deposited $1000 at the end of each year into her Registered Retirement Savings
Plan for the last 10 years. Her investments earned j1 = 5% for the first 4 years for the last 6 years. What
is the value of her RRSP 5 years after the last deposit, assuming that her RRSP continues to earn for
the 5-year period after the last deposit?

SolutionWe arrange the data on a time diagram below.

In this example, there are two blocks. The first block consists of the 4 deposits of $1000 while the interest rate is
i = 5%. The second block consists of the 6 deposits made while the interest rate is i = 4.5%.

We need to accumulate each block to the focal date, which in this case is the end of 15 years (time 15). Don't
forget that the first block of payments is first accumulated to the date of the last payment (time 4) at i = 5%, and
then that accumulated value is accumulated to time 15 at i = 4.5%, which is the interest rate in effect for the 11
years from time 4 to time 15.

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 5/9
4/17/2020 IEB Wireframe

The value of the RRSP 5 years after the last deposit is $15 365.17.

Alternatively, you can first accumulate the two blocks of payments to the date of the 10th and final payment:

Then this amount is accumulated for 5 more years at j1 = 4.5%:

Page 90
Using a Financial Calculator to Calculate Accumulated Values

We will illustrate the process using the Texas Instruments BA-II Plus calculator.

To calculate the accumulated value of an ordinary simple annuity, you will need to enter the term in interest
periods (N key), the periodic interest rate as a number not a percentage (I/Y key), the periodic payment entered
as a negative value (PMT key), and a value of 0 for the present value (PV key). The latter value is entered as a
precaution to avoid incorrect answers. To obtain the accumulated value, hit the CPT key followed by the FV key.

To calculate the periodic payment of an ordinary simple annuity, you will need to enter the accumulated value as
a negative number (FV key). Then hit the CPT key followed by the PMT key.

The following illustrates the proper calculator entries for calculating the accumulated value of the annuity in
Example 3 (Note: the values can be entered in any order):

The following illustrates the proper calculator entries for calculating the semi-annual payment in Example 5a):

Exercise 3.2 Part A

1. Determine the accumulated value of an ordinary simple annuity of $2000 per year for 5 years if money is
worth a) j1 = 9%, b) .

Answers

2. Determine the accumulated value of an annuity of $500 at the end of each month for 4 years at 9%
compounded monthly.
https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 6/9
4/17/2020 IEB Wireframe

3. Lauren deposits $100 every month in a savings account that pays interest at j12 = 4.5%. If she makes her
first deposit on July 1, 2014, how much will she have in her account just after she makes her deposit on
January 1, 2017?

Answers

4. A man deposits R dollars every 3 months beginning March 17, 2010, to September 17, 2013, after which
he deposits 2R dollars beginning December 17, 2013, until June 17, 2019, at which time he will have $25
000. If he can earn j4 = 6% on his money, what is R?

5. Jason is repaying a debt with payments of $120 a month. If he misses his payments for June, July, August,
and September, what payment will be required in October to put him back on schedule if interest is at 6%
compounded monthly?

Answers

6. Determine the accumulated value of an annuity of $50 a month for 25 years if interest is a) 8%
compounded monthly, b) j12 = 3%.

7. Determine the accumulated value of annual deposits of $1000 each immediately after the 10th deposit if
the deposits earned 5% per annum in the first 5 years and 6% per annum in the last 5 years.

Answers

8. Michael deposits $1000 at the end of each half-year for 5 years and then $2000 at the end of each half-
year for 8 years. Determine the accumulated value of these deposits at the end of 13 years if interest is j2 =
7%.

9. Ashley deposits $500 into an investment fund each January 1 starting in 2009 and continuing to 2019
inclusive. If the fund has an average annual growth rate of j1 = 10%, how much will be in her account on
January 1, 2023?

Answers
Page 91

10. Mr. Juneau has deposited $800 at the end of each year into an RRSP investment fund for the last 10 years.
His investments earned j1 = 4% for the first 7 years and j1 = 6% for the last 3 years. How much money
does he have in his account 10 years after his last deposit if rates of return have remained level at j1 = 6%?

11. Rebecca has deposited $80 at the end of each month for 7 years. For the first 5 years the deposits earned
6% compounded monthly. After 5 years they earned 4.5% compounded monthly. Determine the value of
the annuity after a) 7 years, b) 10 years.

Answers

12. What quarterly deposits should be made into a savings account paying j4 = 4% to accumulate $10 000 at
the end of 10 years?

13. It is estimated that a machine will need replacing 10 years from now at a cost of $80 000. How much must
be set aside each year to provide that money if the company's savings earn interest at an 8% annual
effective rate?

Answers

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 7/9
4/17/2020 IEB Wireframe

14. Jack has made semi-annual deposits of $500 for 5 years into an investment fund growing at .
What semi-annual deposits for the next 2 years will bring the fund up to $10 000?

15. Marie deposits $400 at the end of every quarter-year into a fund that pays interest at j4 = 4.4%.

1. How much does she have in the fund at the end of 6 years?

2. If she wishes to have $15 000 at the end of 6 years, what size quarterly deposit does she need?

Answers

16. Ranjini deposits $5000 in a stock fund that pays out dividends at the rate of j1 = 7% at the end of each
year. These dividends are then deposited in her bank account that pays interest at j1 = 5%.

1. How much does Ranjini have in total at the end of 10 years?

2. If both the stock fund and the bank account paid interest at j1 = 6%, how much does she have in
total at the end of 10 years?

Part B

1. Shawn invests $1 which earns interest at an annual rate i1 paid at the end of each year. He reinvests this
interest into a second account that earns interest at an annual rate i2.

1. Show that at the end of n years, Shawn has accumulated a total of .

2. Show that if i1 = i2 = j, then at the end of n years Shawn has accumulated a total of 1(1 + j)n.

2. Jane opened an investment account with a deposit of $1000 on January 1, 2007. She then made monthly
deposits of $200 for 10 years (first deposit February 1, 2007). She then made monthly withdrawals of
$300 for 5 years (first withdrawal February 1, 2017). Determine the balance in this account just after the
last $300 withdrawal (i.e., January 1, 2022) if j12 = 6%.

3. Frank has deposited $1000 at the end of each year into his Registered Retirement Savings Plan for the last
10 years. His deposits earned j1 = 9% for the first 3 years, j1 = 11% for the next 4 years, and j1 = 8% for
the last 3 years. What is the value of his plan after his last deposit?

Answers

4. Prove

1.

2. Illustrate both a) and b) using a time diagram.

5. If and i = 10%, calculate and .

Answers

6. Beginning June 30, 2014, and continuing every three months until December 31, 2018, Albert deposits
$300 into a mutual fund account. Starting September 30, 2019, he makes quarterly withdrawals of $500.
What is Albert's balance after the withdrawal on June 30, 2021, if growth of the mutual fund is at j4 = 8%
until March 31, 2017 and j4 = 6% afterward?

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 8/9
4/17/2020 IEB Wireframe

7. Deposits of $400 are made every 6 months. After 5 years, the deposits are increased to $800. After another
5 years, the deposits are decreased to $600. If the deposits earn j2 = 8%, how much has been accumulated
just before the 26th deposit?

Answers

8. 1. Show that .

2. Verbally interpret this formula.

9. Determine an expression for an accumulation factor for n equal payments of $1 assuming simple interest
at rate i per payment period.

Answers

10. 1. Barbara wants to accumulate $10 000 by the end of 10 years. She starts making quarterly deposits in
her investment account, which pays j4 = 8%. Determine the size of these deposits.

2. After 4 years, the rate of return changes to j4 = 6%. Determine the size of the quarterly deposits now
required if the $10 000 goal is to be met.

Page 92

11. George wants to accumulate $7000 in a fund at the end of 10 years. He deposits $300 at the end of each
year for the first 5 years and then $(300 + x) at the end of each year for the next 5 years. Determine x if
.

Answers

12. You want to accumulate $100 000 at the end of 20 years. You deposit $1000 at the end of each year for the
first 10 years and $(1000 + x) at the end of each year for the second 10 years. Rate of return is .

1. Determine x.

2. If the last 4 payments of $1000 (at the end of years 7 through 10) were missed, what would be the
value of x?

13. Beginning on June 1, 2013, and continuing until December 1, 2018, a company will need $250 000 semi-
annually to retire a series of bonds. What equal semi-annual deposits in a fund paying j2 = 10% beginning
on June 1, 2008, and continuing until December 1, 2018, are necessary to retire the bonds as they fall due?

Answers

https://textflow.mheducation.com/parser.php?secload=3.2&fake&print 9/9