While researching my articles on the UK 2014 budget, I wanted to write a quick note on Annuity prices, yields and interest rates, I came across nothing easy to find or understand. There is a companion wiki article on the UK 2014 Budget. This was created in 2014 and amended in 2023, when the notes on swap pricing was added. Later in the year, I restored the link to Sheshinski’s book. …

This citation got lost in the 2023 tidy up, Sheshinski, Eytan. The Economic Theory of Annuities, Princeton: Princeton University Press, 2008. https://doi.org/10.1515/9781400829422

For dummies

A loan involves a bank giving someone a wedge of cash in exchange for an agreed periodic payment. An annuity involves a bank giving someone an agreed periodic payment in exchange for a wedge of cash. They are the same thing! So we should be able to price them the same way.

These are in fact swaps, and so,

  1. Pricing and valuation of interest-rates and other swaps, from the CFA Institute; interest rate swaps maybe not what we need, although they should be.
  2. How to calculate present value of an annuity by annuity.org. Is this it?
  3. And Annuity pricing 101 has prices and formulae, at Forbes.

4 Replies

  1. This was edited today, the delicious feed reference removed and a couple of links to swap pricing inserted. I think this will help me understand why annuity pricing for pension income is so crap and of course the individualisation is unhelpful i.e. if the risk of penury caused by living longer than expected is shared, albeit by the contributions of those that die early then this minimises individual risk. Insurance is fundamentally a social thing, and the drive for individual pricing based on individual risk profiles in the end will kill the business. Those for whom it’s too expensive will drop out because they can’t afford it, and those for whom its cheap will carry their own risk.

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