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Lesson 38 · Annuities and loans
The geometric series, cashed in
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The geometric series, cashed in

The geometric-series lesson asked you to hold a thought — here is the payoff. Deposit DD at the end of every year at rate ii: the first deposit compounds for n−1n - 1 years, the next for n−2n - 2, the last not at all. Add them up and it is literally a geometric series with ratio 1+i1 + i: FV=D (1+i)n−1i\mathit{FV} = D\,\dfrac{(1+i)^{n} - 1}{i} — read aloud: F-V equals D, times one-plus-i to the n, minus one, all over i.

Run the same gears in reverse and you get the loan: M=P i1−(1+i)−nM = \dfrac{P\,i}{1 - (1+i)^{-n}} — the level payment MM that retires a debt PP in exactly nn payments. Savings build a balance up; payments tear one down; both are geometric series in a suit. One discipline before any button is pressed: mortgage rates arrive yearly and charge monthly — divide by 12 first.

FVDin

FV=D (1+i)n−1i\mathit{FV} = D\,\frac{(1+i)^n - 1}{i}

  • FV\mathit{FV}= Future value (money)
  • DD= Deposit each period (money)
  • ii= Interest rate per period
  • nn= Number of deposits
Future Value of an Annuity (Regular Deposits) solver →
PMni

M=P i1−(1+i)−nM = \frac{P\,i}{1 - (1+i)^{-n}}

  • MM= Payment per period (money)
  • PP= Principal borrowed (money)
  • ii= Interest rate per period
  • nn= Number of payments
Loan Payment (Amortized Loan or Mortgage) solver →