What is meant by annuity due and ordinary annuity?

Annuity Due and Ordinary Annuity: An annuity is a series of equal payments or receipts that occur at regular intervals. The distinction between an annuity due and an ordinary annuity lies in the timing of these payments. 1. Ordinary Annuity: Payments: In an ordinary annuity, payments or receipts occur at the end of each period or interval. Examples: Most common financial transactions are ordinary annuities, such as loan repayments (e.g., car loans, mortgages), bond interest payments, and regular dividend payments. Future Value: The future value of an ordinary annuity calculates the value of a series of payments at the end of the last payment period. Present Value: The present value of an ordinary annuity calculates the value of a series of payments at the beginning of the first payment period (one period before the first payment). 2. Annuity Due: Payments: In an annuity due, payments or receipts occur at the beginning of each period or interval. Examples: Common examples include rent payments (paid at the start of the month), insurance premiums, and lease payments. Future Value: The future value of an annuity due calculates the value of a series of payments one period after the last payment. Each payment earns interest for one additional period compared to an ordinary annuity. Present Value: The present value of an annuity due calculates the value of a series of payments at the time of the first payment. Each payment is discounted one less period compared to an ordinary annuity. Key Differences and Implications: Timing of Payments: The fundamental difference is the timing of cash flows – end of period for ordinary annuity vs. beginning of period for annuity due. Value: Due to the earlier receipt/payment of cash flows, the future value and present value of an annuity due will always be higher than that of an ordinary annuity, assuming the same payment amount, interest rate, and number of periods. This is because each payment in an annuity due has an extra period to earn interest (for future value) or is discounted for one less period (for present value). Therefore, if you are set to make ordinary annuity payments, you will benefit by holding onto your money longer. Conversely, if you are set to receive annuity due payments, you will benefit from receiving your money (value) sooner.