How do I calculate the annuity interest?

When you invest in annuity, you insert a fixed amount of money in the investment vehicle at the beginning or end of several fixed periods of time. At the end of the duration of the investment, you will get the value of the annuity maturity, which is the amount you have invested plus interest. If you want to find the amount of annual interest, you must first calculate the maturity of the annuity and then deduct it with the amount you have invested. If you want to make these calculations, you need to know the amount of money for payment, number of payments, length of each payment period and interest rate.

You can easily understand the concept of calculating the annual interest if you know the basic compound interest. When you invest money in an account that accumulates the interest -rated interest, you will be interested in the director and the previously accumulated interest. In other words, the amount of interest you get at the end of each period increases, the longer your money sits in an investment vehicle.

For example, if you have $ 100, which earns 5 % interest annually, at the end of the first year you will have $ 105.At the end of the second year you will get 5 percent of interest out of $ 105, which means you will have $ 110.25 USD. Your money in the first year will grow by only $ 5, but in the second year it will increase by $ 5.25. The amount of interest you get with time, and you can calculate the value of your investment at the end of any period using the following formula: the initial investment x (1 + interest rate for the period) ^{number of periods . In our example, the calculation for the second year is: 100 x (1 + 0.05) 2}

= 110.25.

with annuity you have to make more sophisticated calculations because you add money each period. You could use a compound interest formula separately to calculate each payment, but such a long calculations could become unmanageable. For easier calculations, use the following formula: an annuity maturity = payment for period x [(1+interest rate for periods) ^{number of periods - 1) / interest rate for the period]. After finding the maturity value, you only need to use this simple formula to find an annuityInterest: maturity value - (number of period x payments for periods).}

Let's say that at the end of each year you invest $ 100 in annuity, which has a life of eight years at an interest rate of 5 percent per year. The maturity value can be calculated by connecting the numbers to the formula: 100 x [(1 + 0.05)

8 - 1) / 0.05] = 954.91. At the end of eight years, after you contribute $ 100 at the end of each year, you will have $ 954.91. In other words, in this case your annuity interest for eight years will be $ 954,91 - (8 x 100) = 154,91 or $ 154.91.

In these examples, we assume that at the end of each period you make payments that are the basic calculation of annuity. However, some annuity has payments at the beginning of each period. In such a case, the formula for calculating the maturity of the annuity becomes: Payment for period x [(1 + interest rate for periods) ^{number of periods + 1 - 1) / interest rate for the period]. We also assume that annuity is an investment but some annuity take the form of a promise to give you a salary insteadwould be in a certain period of time - for example, lottery or pensions. When calculating the actual annuits, you also often have to assume an interest rate because the interest rate varies.}