Annuities due

Definition

Annuities due are a series of equal payments made at the beginning of consecutive periods. They differ from ordinary annuities where payments are made at the end of each period.

5 Must Know Facts For Your Next Test

1. In annuities due, the first payment is made immediately, affecting the present value calculation.
2. Annuities due have a higher present value compared to ordinary annuities due to earlier payment timing.
3. The future value of an annuity due can be calculated by multiplying the future value of an ordinary annuity by (1 + interest rate).
4. Present and future value formulas for annuities due include an adjustment factor to account for the timing of payments.
5. Financial calculators and spreadsheet software often have specific functions for calculating values related to annuities due.

Review Questions

• How does the timing of payments in an annuity due differ from that in an ordinary annuity?
• Why do annuities due have a higher present value compared to ordinary annuities?
• What adjustment factor is used in financial calculations for annuities due?

Related terms

Ordinary Annuity: Payments are made at the end of each period.

Present Value:

The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Future Value:

The value of a current asset at a specified date in the future based on an assumed rate of growth.