Question

when calculating PV of deferred annuities, what is the intuition for # of periods payment is delayed? for example, for a deferred annuity of 2.5 years with int payments seminannually, why do we say payment is deffered by 4 periods? instead of 5 since 2.5 years / 2 payments a year = 5 periods.

Answer 1

It is wrong to treat the period of deferral and the term of the annuity as simultaneous time periods. If a deferred annuity has 1 periods of deferral and 4 annuity term, this is sometimes interpreted, wrongly, as an annuity ending 2 years from today. This should be interpreted as the annuity term ends 2.5 years from today, because the 2 year term does not start until the 0.5 year deferral terminates. Hope this will clarify your query.

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