Definition:
An annuity due is a series of equal cash flows that occur at the beginning of each period. This is in contrast to an ordinary annuity, where payments occur at the end of each period.
Key points about annuity due:
- Timing of payments: The key difference between annuity due and ordinary annuity is the timing of payments.
- Higher present value: Annuity due has a higher present value than an ordinary annuity with the same payment amount, interest rate, and number of periods. This is because the payments are received earlier.
- Calculation: To calculate the present value of an annuity due, you can use the same formula as for an ordinary annuity and then multiply the result by (1 + r), where r is the interest rate.
Why choose an annuity due over an ordinary annuity?
- Higher present value: If you need the funds immediately, an annuity due can provide a higher present value than an ordinary annuity.
- Investment strategy: Annuity due can be a valuable investment strategy, especially if you are looking for a steady stream of income that starts immediately.
In essence, annuity due is a type of annuity where payments are made at the beginning of each period, offering a higher present value compared to an ordinary annuity.
