Annuity

A level payment made every period for a fixed number of periods, in its ordinary form at the end of each. Its value is a perpetuity less the perpetuity that would have begun after the final payment.

Where you will meet it

Annuity appears in 5 learning outcomes on the CFA syllabus. A few of them:

• Work out what an annuity and a perpetuity are worth today
  CFA Level I · Quantitative Methods

  “An annuity is a fixed payment for a fixed number of periods; a perpetuity is the same payment forever.”

• Explain how the Black model values European swaptions and European interest rate options
  CFA Level II · Derivatives and Risk Management

  “A payer swaption, the right to pay fixed, is a call on the forward swap rate: notional × annuity factor (the sum of discount factors over the underlying swap) × [FS × N(d1) − X × N(d2)].”

• Set out the common ways private wealth firms charge clients, earn revenue and pay their advisers
  CFA Level III · Private Wealth Pathway

  “Each structure carries incentives: commissions reward turnover, and asset-based fees can discourage advice that reduces assets under management, such as repaying debt or buying an annuity.”

• Propose, and defend, ways to handle a family's financial risks as a whole through working life and into retirement
  CFA Level III · Private Wealth Pathway

  “Methods include insurance (life, disability, health, long-term care, property), annuities for longevity, emergency reserves, and an asset allocation that reflects whether human capital is bond-like or equity-like.”

See also

Perpetuity

Learn it properly

• Time value of money explained: present value, future value and annuities Guide

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with A · Glossary