Chapter 5 - Annuities
Chapter 5 - Annuities
Section 5.3 - Review of Annuities-Certain
Annuity Immediate - It pays 1 at the end of every year for n years.
The present value of these payments is:
where
=
1 1+i
.
5-1
Annuity-Due - It pays 1 at the beginnig of every year for n years.
The present value of these payments is:
where
d
=
i 1+i
.
5-2
Continuous Payment Annuity - It smears the payment of 1 over each year for n years.
The present value of this smear of payments is: where = ln(1 + i).
5-3
mthly
Annuity
Immediate
-
It
pays
1 m
at
the
end
of
every
1 m
part
of
the
year for n years.
The present value of these payments is:
where
1
+
i (m) m
m = (1 + i) = -1.
5-4
mthly
Annuity
Due
-
It
pays
1 m
at
the
beginning
of
every
1 m
part
of
the
year for n years.
The present value of these payments is:
where
1
-
d (m) m
-m = (1 + i) = -1.
5-5
Section 5.4 - Annual Life Annuities
The annual life annuity pays the annuitant (annuity policyholder) once each year as long as the annuitant is alive on the payment date. If the policy continues to pay throughout the remainder of the annuitant's life, it is called a whole life annuity. Subsection 5.4.1 - Whole Life Annuity-Due Payments of $1 are made at the beginning of each year of the annuitant's remaining life. The present value random variable is
5-6
The only random part of this expression is Kx+1. We have already found in chapter 4 (pages 4-6, 4-7) that
E Kx +1 = Ax
and
E Kx +1 2 = 2Ax .
Because Y is a linear function of Kx+1, we immediately get the EPV and Var[Y] to be
5-7
An alternative expression for the EPV can be found by noting that Y = I(Tx > 0) + I(Tx > 1) + 2I(Tx > 2) + ? ? ?,
where I({event}) = 1 if the event occurs and 0 otherwise. Clearly,
We also note that
Y = (1)I(0 Tx < 1) + (1 + )I(1 Tx < 2)
+(1 + + 2)I(2 Tx < 3) + ? ? ?
or
5-8
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