Final answer:
To find the annuity value equivalent to a present amount, use the present worth factor of an annuity. The present value is found by calculating the present worth of each periodic annuity payment and summing them up. This value is affected by interest rates, as illustrated by the case of bonds and their interest rate risks.
Step-by-step explanation:
To find the annuity value, A, equivalent to a present amount, P, with a given interest rate, I, and the number of periods over which this annuity will be paid, N, one would use the present worth factor of an annuity. The calculation for the present value (PV) of an annuity involves determining the present value of each periodic payment in the annuity stream and then summing these present values to arrive at the total present worth of the annuity. The present value calculations ask what an amount in the future is worth today, given a specific interest rate. For example, to calculate the present value of a future payment, you must decide what amount you would need in the present to equal a certain future amount at the given interest rate. To expand on this point, consider the case of purchasing a bond with an annual fixed interest rate. If market interest rates rise after the bond purchase, the present discounted value of future payments from the bond would decrease, illustrating how interest rates affect the valuation of future cash flows.