Question

1. Are the number of compoundings per year (conversions) and number of payments per year equivalent in a general annuity
2. Is there is a calculation for the future value of a perpetuity? In solving an ordinary general annuity calculation, what interest rate is used?

Answer 1

If there is no end date, then no future value formula.To find FV of Perpetuity, it require number of periods (i.e)up to the point of perpetuity can also be treated as ordinary annunity.

Perpetuity:

Present Value =   Cash Flow / Interest rate or yield

The future Value of an annunity is total value of payment at a specific point of time..

Assume if you invest $ 2000 every year for next five years with interest of 5%.Calculate FV of ordinary annuity.

Fv= C * [(1+i)n -1/i].

where, c= cash flow per period;

i =interest rate

n= number of payments.

FV =$ 2000 *[(1+0.05)5 -1 / 0.05]

FV =$2000 * 5.53= $ 11,060.