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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

Meera Traders pays Rs 10,000 at the end of each year for 3 years into a deposit earning 10% p.a. compound interest. Which term correctly describes this stream of payments, and what is its future value at the end of year 3?

It is an ordinary annuity because payments fall at the end of each year, and its future value is Rs 33,100, computed as 10,000 times 3.31. The annuity-due figure of Rs 36,410 would apply only if payments were made at the start of each year.

  1. AAnnuity due; Rs 36,410
  2. BOrdinary annuity; Rs 33,100Correct
  3. COrdinary annuity; Rs 36,410
  4. DPerpetuity; Rs 33,100

Explanation

Payments at the end of each period make it an ordinary annuity (annuity immediate). FV = 10,000 x [(1.1^3 - 1)/0.1] = 10,000 x 3.31 = Rs 33,100. Rs 36,410 is the annuity-due value (33,100 x 1.1), which wrongly assumes payments at the start of each year.

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