Ordinary annuity

Definition

Ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time. Commonly used in financial calculations, it's essential for determining present and future values in capital budgeting.

5 Must Know Facts For Your Next Test

1. Payments are made at the end of each period.
2. Used to calculate present and future value using time value of money principles.
3. Ordinary annuities assume constant payment intervals.
4. The interest rate impacts both the present and future value calculations.
5. Common examples include loan repayments and retirement savings plans.

Review Questions

• What distinguishes an ordinary annuity from an annuity due?
• How does the timing of payments affect the calculation of present value in an ordinary annuity?
• Why is understanding ordinary annuities important for capital budgeting decisions?

Related terms

Present Value (PV): The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Future Value (FV): The value of a current asset at a specified date in the future based on an assumed rate of growth.

Annuity Due: A series of equal payments made at the beginning of consecutive periods over a fixed length of time.