## Solving Annuity Problems

At the beginning of the section, we looked at a problem in which a couple invested a set amount of money each month into a college fund for six years. An annuity is an investment in which the purchaser makes a sequence of periodic, equal payments. To find the amount of an annuity, we need to find the sum of all the payments and the interest earned. In the example, the couple invests $50 each month. This is the value of the initial deposit. The account paid 6% annual interest, compounded monthly. To find the interest rate per payment period, we need to divide the 6% annual percentage interest (APR) rate by 12. So the monthly interest rate is 0.5%. We can multiply the amount in the account each month by 100.5% to find the value of the account after interest has been added. We can find the value of the annuity right after the last deposit by using a geometric series with ${a}_{1}=50$ and $r=100.5%=1.005$. After the first deposit, the value of the annuity will be$50. Let us see if we can determine the amount in the college fund and the interest earned.

We can find the value of the annuity after $n$ deposits using the formula for the sum of the first $n$ terms of a geometric series. In 6 years, there are 72 months, so $n=72$. We can substitute ${a}_{1}=50, r=1.005, \text{and} n=72$ into the formula, and simplify to find the value of the annuity after 6 years.

${S}_{72}=\frac{50\left(1-{1.005}^{72}\right)}{1 - 1.005}\approx 4\text{,}320.44$

### Solution

The value of the initial deposit is $100, so ${a}_{1}=100$. A total of 120 monthly deposits are made in the 10 years, so $n=120$. To find $r$, divide the annual interest rate by 12 to find the monthly interest rate and add 1 to represent the new monthly deposit. $r=1+\frac{0.09}{12}=1.0075$ Substitute ${a}_{1}=100\text{,}r=1.0075\text{,}\text{and}n=120$ into the formula for the sum of the first $n$ terms of a geometric series, and simplify to find the value of the annuity. ${S}_{120}=\frac{100\left(1-{1.0075}^{120}\right)}{1 - 1.0075}\approx 19\text{,}351.43$ So the account has$19,351.43 after the last deposit is made.

### Try It 15

At the beginning of each month, \$200 is deposited into a retirement fund. The fund earns 6% annual interest, compounded monthly, and paid into the account at the end of the month. How much is in the account if deposits are made for 10 years?

Solution