Mathematical annuity models application in cash flow analysis

Abstract

Many problems arising in the mathematics of finance involve identical money flows at regular time intervals and are solved by appropriate valuation at a focal date or by setting up an equation of value. This paper shows how such problems can be viewed as special cases of a certain class of first-order difference equations. To illustrate the annuity models, we draw tables to compare the reinvestment of benefit from a fixed deposit and the usual simple interest method. We also compare the cost efficiency between Amortisation and Sinking fund loan repayment as prevalent in financial institutions.

Keywords: Annuity, Amortisation, Sinking Fund, Present and Future Value Annuity, Maturity date and Redemption value.