DIFFERENCE BETWEEN ORDINARY ANNUITY AND ANNUITY DUE

An annuity is a series of equal payments made at the beginning or end of the regular period.

Although there are many other annuity kinds, there are two main types: regular annuity and annuity due.

An annuity due is a series of equal payments made at end of the period, as opposed to an ordinary annuity, which is a stream of equal payments made at the beginning of the period

This post will discuss the most important difference between an ordinary annuity and an annuity due.

Differences between Ordinary annuity and annuity due

1. In contrast to annuity due, which are streams of equal made or received at the beginning of each period, ordinary annuities are made or received at the end of each period.

2. While annuities due are better for receiving payments, ordinary annuities are best for making payments

An ordinary annuity is preferred for payment because you make the payment later than if it were an annuity due

Annuity due is preferred for receipts because you received payment one period later than if it were an ordinary annuity.

3. The present value for an ordinary annuity is lesser than the annuity due and the present value for an annuity due is higher than an ordinary annuity.

4. The amount of the periodic cash flow in the ordinary annuity is greater than the annuity due because it includes interest for the period.

5. The future value of an annuity due is usually greater than an ordinary annuity. Similarly, the future value of the ordinary annuity is usually lesser than the annuity due.

6. An example of an ordinary annuity is the payment of the mortgage. An example of an annuity due is an insurance premium

7. The cash flows of the annuity due occur one period earlier than the cash flows of an ordinary annuity.

This is because payment or receipt of annuity due start immediately as opposed to the end of the period as is the case with an ordinary annuity.

READ ALSO: INTRODUCTION TO ANNUITY

Tabular Comparisons of Annuity due and Ordinary annuity

FeaturesOrdinary annuityAnnuity due
Payment is made atthe Ending of the periodBeginning of the period
Cash flow occursOne period later than annuity dueOne period earlier than Ordinary annuity
Present valuelesser than annuity dueGreater than an ordinary annuity
Suitable forPaymentReceipt
Future valueLesser than annuity dueGreater than an ordinary annuity
ExamplePayment of mortgageInsurance premium
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