Final answer:
The monthly income from an annuity is determined by the interest rate and the annuity's specific payout terms, and is not a static figure. It's similar to how the income from bonds is affected by interest rate risks and can be calculated using the present discounted value based on current interest rates. This concept highlights the importance of understanding opportunity costs and present value in financial decisions.
Step-by-step explanation:
The monthly income that each $1,000 of an annuity contract's values will generate is dependent on the specified interest rate and the annuity payout option, rather than being a fixed rate such as the annuity purchase rate, the assumed interest rate (AIR), or directly linked to the annuity's total accumulated value or the initial premium deposit. Annuities involve interest rate risk, similar to bonds, where the desirable current income is influenced by prevailing interest rates in the market. If interest rates increase after a bond with a lower interest rate was purchased, the bondholder receives less income compared to new bonds issued at the higher rate, demonstrating the concept of opportunity cost. Similarly, annuities could be affected by changing rates.
To calculate the present discounted value of future annuity payments, one must consider the interest rates. For instance, if the interest rate is 25%, a future payment of $125 has a present discounted value of $100 - the amount that would grow to $125 in a year at the given interest rate. Hence, the income generated from an annuity will depend on the rates used in these calculations and the terms of the annuity itself.