How to Calculate Annuities With Monthly Interest Rates

by C. Taylor

An annuity can represent a loan or an investment that offers a series of regular, fixed payments. The only difference between a loan annuity and an investment annuity is the direction of cash flow. With a loan you repay to the lender, whereas investments are repaid to you. Annuities are normally offered with an annual interest rate, but they may compound monthly. If that's the case, you would calculate the required investment or loan total based on the monthly interest rate and payment.

1. Divide the annual interest rate by 12 to calculate the monthly interest rate. For example, if your investment annuity offered a 6 percent annual interest rate, you would divide 0.06 by 12 to get a 0.005 monthly rate.

2. Add 1 to this number. In the example from the previous step, you would have 1.005.

3. Raise this number to the N power, where N is zero minus the number of months in the annuity's life. Continuing with the example, if the investment annuity was 15 years, you would multiply 15 by 12 to calculate 180 months. You would then raise 1.005 to the power of -180 to get 0.4075.

4. Subtract this number from 1. In the example, you would get 0.5952.

5. Divide this number by the monthly interest rate of 0.005. In the example, you would get 119.4.

6. Multiply this figure by the monthly payments to calculate the present value of the annuity. This is the amount of the loan or the one-time investment to achieve your annuity goals. In the example, if you wanted to receive $800 per month, you would multiply $800 by 119.4 to get a required one-time investment of $95,520.

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