MGCR 341 Lecture Notes - Lecture 3: Life Annuity, Cash Flow, Annual Percentage Rate

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A simple or constant annuity is a stream of identical cash flows c received for n period. The first cash flow is received one period from now. An annuity with n payments is equal to a perpetuity minus a forward starting perpetuity with first payment at t=n+1. Annuities: uses and other types *not for final exam or midterm. Commonly used structure in insurance produces (some tax advantages) Life annuity: paid periodically for the rest of your life. Variable annuity: payment varies according to investment performance. Often people take out lump sum payments instead of the annuities after the accumulation phase. Perpetual stream of cash flows growing at rate g. Ratio of consecutive cash flows is (1+g) The formula for pv is only valid if g

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