What is growing annuity ?
The growing annuity payment is used in order to calculate an initial payment in a series of payments. The initial payment is part of a collective payment system that is carried out on a continuous basis. The payments are unique, as they grow at a proportionate rate. This is an important part of the overall equation that helps to determine the first, initial payment. Present value must be known in order to use this specific method. A growing annuity works when the present value is known. Present value is an important factor when finding the value of the growing annuity payment.
If an initial payment is valued at $100 and the payments grow by a total of 10% per year, the next payments will be higher in value than the first. This will steadily increase the payments every single year. This is another very common method used for growing annuity payments. In order to calculate the initial payment with the growing annuity, rearranging the present value is a necessary step for the formula. In order to calculate the initial payment, dividing both sides of the second portion will enable the equation to be solved. The present value and the initial payment should be equal by this stage in the equation. There are many innovative and practical uses for growing annuity payments. Determining the value of the payments is very important in order to accurately manage and pay back a loan. Paying back a loan requires multiple steps and also depends on the type of loan.
Initial payment = f( P,r,g,n) where P is First payment, r rate per period, g growth rate and n number of periods.
Every loan is different, therefore it is important to understand which type of loan is being used. Growing annuity payments also be calculated for their value at a future date. A 10% growth rate would allow the third payment of the loan to be valued at $121. This is a significant increase from the initial payment of $100. By allowing for a continuous increase, the value of the payment will be higher each and every pay period. Growing annuity payments are becoming increasingly popular for many types of loans. As stated previously, there are many different types of loans available, therefore it is important to fully understand which type of loan is being used.
The equation for calculating the growing annuity payment can be completed by multiplying the present value by the reciprocal denominator. By multiplying the PV by the reciprocal denominator, the formula will be returned. This is a simple and convenient method for ensuring that the growing annuity payment is strategically calculated and accurate in order to be used on a consistent basis. As stated previously, the present value plays a large role in the overall equation involving growing annuity payments.
The payments are guaranteed to increase based upon the terms of the loan. For example, the most common type of payment is increased annually. However, it is important to note that payments can increase monthly, depending upon the terms of the loan. Understanding which type of loan is used is important for ultimate success with loan management.
When we talk about stocks sometimes we can see this term in company reports.