Ordinary annuity

Definition

An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time. Examples include mortgage payments, car loan payments, and retirement savings contributions.

5 Must Know Facts For Your Next Test

1. Payments are made at the end of each period in an ordinary annuity.
2. The future value of an ordinary annuity can be calculated using the formula FV = P * [(1 + r)^n - 1] / r.
3. The present value of an ordinary annuity can be determined using PV = P * [1 - (1 + r)^-n] / r.
4. Ordinary annuities differ from annuities due, where payments are made at the beginning of each period.
5. Interest rate and number of periods are crucial variables in calculating both the present and future values of an ordinary annuity.

Review Questions

• How do you differentiate between an ordinary annuity and an annuity due?
• What formula is used to calculate the future value of an ordinary annuity?
• Why is it important to know whether payments are made at the beginning or end of each period?

Related terms

Annuity Due:

Payments are made at the beginning of each period rather than at the end.

Present Value:

The current worth of a sum that will be received in the future, discounted for time and interest.

Future Value:

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