Fixed annuity
An annuity that pays a fixed, unchanging amount at each regular period, agreed at the time of investing — as against a floating annuity, whose payouts move with an inflation or index benchmark.
In plain language
An annuity is simply a sum of money paid out at regular intervals — monthly, quarterly, or yearly. A pension is the everyday example most people already know.
Annuities come in two forms. A fixed annuity pays the same amount every period, fixed in advance and agreed when the investment is made. A floating annuity, the other kind, pays an amount that moves instead — benchmarked to inflation, an index, or some other return specified when the investment was bought.
A fixed deposit paying a set rate for a set term is the workbook's own example of a fixed annuity in practice: whatever the rate is when the deposit is opened, the payout stays at that level for the life of the deposit.
How it works
The workbook's definition: fixed annuity means that fixed returns are received at regular periods. Its example is a bank fixed deposit paying 5.5% p.a. on the investment for a predetermined term, say five years — the 5.5% payout does not change over that term, regardless of what happens to interest rates elsewhere in the market.
A floating annuity works differently: its return is benchmarked to inflation, an index, or another return specified in the agreement at the time of purchase, so the amount paid out changes over the life of the annuity as that benchmark moves.
A worked example
Mr Verma invests Rs 10,00,000 in a 5-year bank fixed deposit paying 5.5% p.a., a fixed annuity. Every year, he receives exactly Rs 55,000 — the same amount, whether market interest rates rise to 8% or fall to 4% during those five years.
Had Mr Verma instead chosen a floating annuity product benchmarked to inflation, his annual payout would rise in a high-inflation year and fall in a low-inflation one — a fixed annuity trades away that variability, in either direction, for certainty.
Why NISM asks about it
Chapter 2 (Time Value of Money), section 2.2.6 (Annuity), introduces the fixed-versus-floating distinction with the 5.5% fixed deposit example, before the chapter builds up to ordinary and due annuity calculations. Expect a question distinguishing a fixed from a floating annuity, or one testing whether a candidate can identify a fixed deposit as an example of a fixed annuity.
Common exam traps
- Fixed refers to the amount paid each period being constant, not to the annuity being risk-free — a fixed annuity from a weak issuer still carries credit risk.
- Do not confuse fixed versus floating annuity with ordinary versus annuity due — one distinction is about whether the payout amount changes; the other is about when in the period the payout is made. They are independent classifications.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Annuity dueAn annuity whose payments fall at the beginning of each period rather than the end, which makes it worth more than an otherwise identical ordinary annuity.
- Annuity tableA pre-computed table that gives the present-value multiple, or annuity factor, for a given interest rate and number of years, letting you value a regular cash flow without solving the formula each time.
- Discount rateThe rate used to bring a future cash flow back to today's value — the higher this rate, the lower a given future amount is worth in present-day rupees.
- EMIThe Equated Monthly Instalment — the fixed monthly payment on a loan that covers both interest and a portion of the principal, calculated so the loan is fully repaid by the end of its term.
- Joint annuityAn annuity payout option under which the spouse continues to receive the annuity for lifetime after the death of the investor.
- Floating annuityAn annuity whose payout is not fixed but moves with a chosen benchmark — inflation, an index, or another agreed return — decided when the investment is made, as against a fixed annuity.