How to calculate the return on an annuity

Dear Mr Tan,

I am keen in this 'guaranteed income' product, but i was puzzled how they workout the yield as posted on income site, say 5 yrs term giving 3.46%?

Illustration: An investment of $100,000 provides an annual income of $22,125. The interest rate is shown as 3.46%.

My calculation is:

annual payout is 22,125-20,000 = 2,125 p.a
yield = 2,125/100,000 is only 2.152% p.a.

EK

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Dear EK

To calculate the interest rate for this type of payment, you have to work out the reducing balance in each year, and find the right rate of interest that produces the correct result, is reduces to nil at the end of 5 years. We use a financial calculator to work out the sums.

If you calculate year by year and use the interest rate of 2.152%, you will find that there is insufficient money to make the final payment of $22,125.

You can use an Excel spreadsheet to work out the sums, using the interest rate of 2.152% and 3.46%.

Tan Kin Lian