1. What is the Annuity Formula?

The annuity formula calculates the present value of a series of future equal payments (annuity) discounted at a specific interest rate. It's widely used in finance for loan calculations, retirement planning, and investment analysis.

2. How Does the Calculator Work?

The calculator uses the annuity formula:

Where:

• \( PV \) — Present value of the annuity (USD)
• \( PMT \) — Periodic payment amount (USD)
• \( r \) — Interest rate per period (decimal)
• \( n \) — Number of payment periods (unitless)

Explanation: The formula discounts each future payment back to its present value and sums them all together.

3. Importance of PV Calculation

Details: Present value calculation helps compare investment options, determine loan amounts, and plan for future financial needs by accounting for the time value of money.

4. Using the Calculator

Tips: Enter the periodic payment in USD, interest rate as a decimal (e.g., 0.05 for 5%), and number of periods. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between ordinary annuity and annuity due?
A: Ordinary annuity payments occur at the end of each period, while annuity due payments occur at the beginning. This calculator assumes ordinary annuity.

Q2: How does compounding frequency affect the calculation?
A: The rate (r) and periods (n) must match the compounding frequency. For monthly payments with annual rate, divide rate by 12 and multiply years by 12.

Q3: What are common uses for this calculation?
A: Mortgage calculations, retirement planning, bond valuation, and any scenario with regular fixed payments.

Q4: What if the interest rate is zero?
A: The formula simplifies to PV = PMT × n, as there's no time value of money.

Q5: How does inflation affect the result?
A: The interest rate should be a real rate (nominal rate minus inflation) to account for purchasing power.