What Is Annuity Due?

An annuity due is an annuity with a payment due immediately at the beginning of each period. A common example of an annuity due payment is rent, as 澳洲幸运5官方开奖结果体彩网:landlords often require payment upon t🦹he start of a new month as opposed to collecting it after the renter has enjoyed the benefits of the apa♏rtment for an entire month.

How an Annuity Due Works

An annuity due requires payments made at the beginning, as opposed to the end, of each annuity period. Annuity due payments received by an individual legally represent an asset. Meanwhile, the individual paying the annuity due🍃 has a legal debt liability requiring♐ periodic payments.

Because a series of annuity due payments reflect a number of future cash inflows or outflows, the payer or recipient of the funds may wish to calculate the entire value of the annuity while factoring in the 澳洲幸运5官方开奖结果体彩网:time value of money. One can accomplish this by using 澳洲幸运5官方开奖结果体彩网:present value calculations.

A present value table for an annuity due has the projected interest rate across the top of the table and the number of periods as the left-most column. The intersecting cell between the appropriate interest rate and the number of periods rep♐resents the present value multiplier. Finding the product between one annuity due payment and the present value multiplier yields the prese🥀nt value of the cash flow.

A 澳洲幸运5官方开奖结果体彩网:whole life annuity due is a financial product sold by insurance companies that requires annuity payments at the beginning of each monthly, quarterly, or annual period, as opposed to at the end of the period. This is a type of annuity that will provide the holder with payments during the distribution period for as long as they live. After the 澳洲幸运5官方开奖结果体彩网:annuitant dies, the🐎 insurance company retains any funds remai🔯ning.

Annuity Due vs. Ordinary Annuity

An annuity due payment is a recurring issuance of money upon the beginning of a period. Alternatively, an ordinary annuity payment is a recurring issuance of money at the end of a period. Contracts and business agreements outline this payment, and it is based on when thܫe benefit is received. When paying for an expense, the beneficiary pays an annuity due payment before receiving the benefit, whil✃e the beneficiary makes ordinary due payments after the benefit has occurred.

The timing of an annuity payment is critical based on 澳洲幸运5官方开奖结果体彩网:opportunity costs. The collector of the payment may invest an annuity due payment collected at the beginning of the month to generate interest or 澳洲幸运5官方开奖结果体彩网:capital gains. This is why an annuity due is more beneficial for the recipient, as they have the potential to use the funds faster. Alternatively, individuals paying an annuity due lose out on the opportunity to uღse the funds for an entire period. Those paying annuities thus tend to prefer ordinary annuities.

Examples of an Annuity Due

An annuity due may arise due to any recurring obligation. Many monthly bills, such as rent, car payments, and cellphone 💙payments, are annuities due because the beneficiary must pay at the beginning of the billing period. Insurance expenses are typically annuities due, as the insurer requires payment at the start of each coverage period. Annuity due situations also typically arise when saving for r🦩etirement or putting money aside for a specific purpose.

How to Calculate the Value of an Annuity Due

The 澳洲幸运5官方开奖结果体彩网:present and future values of an annuity due can be calculated using slight m🦋odifications to the present value and future value of an ordinary annuity.

Present Value of an Annuity Due

The present value of an annuity du⛎e tells us the current value of a series of expected annuity payments. In other words, it shows what the future total to be paid is worth now.

Calculating the present value of an annuity due is similar to calculating the present value of an ordinary annuity. However, there are subtle differences to account for when annuity payments are due. For an annuity due, payments are made at the beginning of the interval, and for an ordinary annuity, payments are made at the end of a period. The 澳洲幸运5官方开奖结果体彩网:formula for the present value of an annui🏅ty due is:

where:

• C = Cash flows per period
• i = interest rate
• n = number of payments

Let's look at an example of the present value of an annuity due. Suppose you are a 澳洲幸运5官方开奖结果体彩网:beneficiary designated to immediately receive $1000 each year for 10 years, earning an annual interest rate of 3%. You want to know how much the stream of payments is wort🌟h to you today. Based on the present value formula, the present value is $8,786.11𝐆.

Future Value of an Annuity Due

Tꦚhe future value of an annuity due shows us the end value of a series of expected payments or the value at a future date.

Just as there are differences in how the present value is calculated for an ordinary annuity and an annuity due, there are also differences in how the future value of money is calculated for an ordinary annuity and an annuity due. The 澳洲幸运5官方开奖结果体彩网:future value of an annuity due is calculated as:

Using the same example, we calculate that the future value of the stream of income payments to be $11꧙,807.80.

The Bottom Line

An annuity due is an annuity with payment due or made at the beginning of the payment interval. In contrast, an ordinary annuity generates payments at the end of the period. As a result, the method for calculating the present and future values differ. A common example of an annuity due is rent p🤪ayments made to a landlord, and a common example of an ordinary annuity includes ♛mortgage payments made to a lender. Depending on whether you are the payer or payee, the annuity due might be a better option.