Annuity Payments

Annuities are the periodical payments that the borrower must pay to the lender for the bond.

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for $1,000 at a 5% stated annual interest rate.

We're given the bond amount here...

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for $1,000 at a 5% stated annual interest rate.

...and told that it has a "stated" 5% annual interest rate.

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for $1,000 at a 5% stated annual interest rate.

What this means is that to compute the annuities (a.k.a. interest payments) for each of the 5 years we hold the bond...

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for $1,000 at a 5% stated annual interest rate.

...we must do the following calculation...

Annuity = Face Amount x Stated Annual Interest Rate
Annuity = $1,000 x 5%
Annuity = $50

...resulting in annuity payments of $50 for each of the 5 years!

Annuity = Face Amount x Stated Annual Interest Rate
Annuity = $1,000 x 5%
Annuity = $50

This means that each year, you owe the local bank $50 in an annuity payment!

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