Generating Future and Present Values of Annuity Using Interest Rate Theory

The present value of an annuity is the current value of the future payments from an annuity, given a specified rate of discount. The Future value of an annuity is the estimated value of current asset at specific time in the future based on an assumed growth rate. The future and present values of annuity were mathematically generated on the basis of interest rate theory. This was anchored on the fact that every compound interest problem involves the annual rate and the rate per compounding period. The derivations of both present and future values of annuity were established with real life applications. It was also shown that as the frequency of compounding periods increases, the compound amount behavior tends to exponential growth rate. It was deduced that effective rate of interest is a function of nominal rates and compounding periods.