Annuities are a series of payments made on a regular schedule that possess both a beginning and a end while perpetuties are a series with a payments with a beginning but no end. Mortgages and other loans are annuities while stock share dividends are perpetuities. Fair market price or fair value of annuities is equal to the sum of present values of all cash flows that constitute the series of payments, where present value is the sum of money available now that is worth the same as a different sum sometime in the future.
Annuity is a term used to describe repeated payments that have both beginning and ending points in time. For example, if a creditor agrees to pay a debt to the debtor in six payments over six months, that can be counted as an annuity. Ordinary annuities make the payments at the end of each time period while annuities-due make the payments at the beginning of each time period.
Time Value of Money
A sum of money in one period is not worth the same sum of money in a different period. This is due to the influences of either inflation or deflation and the opportunities that money represents. For example, an individual with $100 available immediately can invest that and make a profit on the interest whereas an individual with $100 available in a year's time cannot do the same. Comparisons of cash flows are useful only when said receipts and expenditures have been converted to the same time period.
Present Value of an Annuity
Present value is the sum of money in the current period that is worth the same as another sum of money sometime in the future. Present value of an annuity is the sum of present values of all cash flows that comprise the annuity. For example, if an annuity consisted of two separate payments of $100 in two years and the interest rate was 10 percent in both years, its present value can be calculated to be $173.55 or 100/1.1 + 100/1.1^2.
Future Value of an Annuity
A future annuity might refer to the future value of an annuity or to an annuity that is set to begin sometime in the future. Future value refers to a sum of money sometime in the future that is worth the same as another sum of money available right now. For example, $1,000 available now is worth the same as $1,100 in a year's time if the interest rate for the upcoming year is 10 percent because 1,000*1.1 equals 1,100.