Difference Between Ordinary Annuity and Annuity Due (with Comparison Chart) - Key Differences
The first cash flow received immediately is what distinguishes an annuity due from an ordinary annuity. An annuity due is sometimes referred to as an immediate. This article explains the conceptual difference between an ordinary annuity and Future Value of an Annuity Due: Let's say that we want to calculate the future. Distinction between an Ordinary Annuity and an Annuity-Due; Calculating an annuity due; i.e., in relation to an ordinary annuity (discussed further in In other words, to calculate either the present value (PV) or future value.
For instance when you take a house on rent, the rent is usually paid in advance whereas when your mortgage payments are usually made at the end of every period.
Ordinary Annuity vs. Annuity Due
So the payments made at the end of every period are called ordinary annuity. This is because ordinary annuity is the usual state of affairs. Usually all annuities are paid at the end of the period.
Alternatively, when annuity payments are made in advance, we call them annuity due. The difference in the formula to calculate the two different types of annuities is very small.
Also, the difference in amounts is not expected to be large either.
However, to be precise, a student of finance must know the difference between ordinary annuity and annuity due and know when to use the formulas. One Extra Period As we seen that ordinary annuity payments are made at the end of each period whereas the payments for annuity due are made at the beginning of each period.
Future Value of Annuity Due - Formula and Calculator
Hence, the difference between ordinary annuity and annuity due is one extra period. Thus, an adjustment needs to be made for this one extra period while calculating both the present value and future value of an annuity due. Future Value of an Annuity Due: Rental lease payments, life insurance premium, etc. Definition of Ordinary Annuity Ordinary Annuity is defined as a series of regular payments or receipts; that occurs at regular intervals over a specified number of periods.
It is also known as annuity regular or deferred annuity. In general, ordinary annuity payment is made on a monthly, quarterly, semi-annual or annual basis. The present value of the ordinary annuity is computed as of one period prior to the first cash flow, and the future value is computed as of the last cash flow. Present Value PV of ordinary annuity: The first cash flow of the annuity falls due at the present time. The most common example of an annuity due is the rent, as the payment should be made at the start of the new month.
As in the case of an ordinary annuity, the present and future values of the annuity due are also calculated as first and last cash flows respectively. Ordinary annuity refers to the sequence of steady cash flow, whose payment is to be made or received at the end of each period.
Annuity due implies the stream of payments or receipts which fall due at the beginning of each period.