Calculating the present value of an annuity using Microsoft Excel is a fairly straightforward process if you know the annuity's interest rate, payment amount, and duration. Calculating this value is only feasible when you're dealing with fixed annuities, however. The same calculation can't be made with variable annuities because their 澳洲幸运5开奖号码历史查询:rates of return typically fluctuate in tandem with a stock market index or a money market index.

Understanding Annuities

An annuity is a contract between an investor and an insurance company. The investor purchases the annuity and the company then provides a stream of income in exchange. It's something like a life insurance policy in reverse. It doesn't pay out at the insured's time of death but rather during their lifetime.

The purchase amount can be paid all at once or in monthly payments. An accumulation phase must be completed in either case before the annuitant begins receiving payments from the company. This begins what's referred to as the 澳洲幸运5开奖号码历史查询:annuitization period. The period can be for a contractual time or the remainder of the annuitant's life.

Fixed vs. Variable Annuities

Annuities can be fixed or variable. Fixed annuities are guaranteed to pay a minimum rate of return for a specified period that's determined by the contract. You'll most likely pay a penalty if you terminate the contract before this time.

The rate of return on a variable annuity depends on a stock market or money market index. It holds investments similar to an individual retirement account (IRA). Your balance and payments will move up and/or down with the market but growth is tax-deferred. Payments are typically greater than those provided by a fixed annuity.

Variable annuities are more difficult to value accurately. They leave♓ investors in the unten♔able position of having to blindly guess at future rates.

Pricing a Fixed Annuity in Excel

The price of a fixed annuity is the present value of all future 澳洲幸运5开奖号码历史查询:cash flows. An investor would havꦏe to know the amount of money they must pay today to receive the sജtated rate of return for the duration of the annuity.

An investor could 澳洲幸运5开奖号码历史查询:use Excel to determine the cost of setting up this offering if they wanted to receive $1,000 per month for the next 15 years and the stated annuity rate was 4%. This calculation doesn't account for 澳洲幸运5开奖号码历史查询:income taxes due on the annuity payouts.

The Bottom Line

An annuity is a contract between an investor and an insurance company that’s similar to life insurance but it 𒁏pays out based on a rate of return during the investor’s lifetime rather than at their time of death.

It’s possible to calculate the present value of an annuity using Excel but you’ll need some information at your fingertips: the annuitization period, the payment amount, and the iܫnterest rate. It can only be accomplished with fixed annuities because the rates of return on variable annuities aren’t fixed. They can fluctuate based ꦜon the market.