Comparison Chart Key Differences Conclusion

Difference Between Ordinary Annuity and Annuity Due
Last updated on January 5, 2018 by Surbhi S
An annuity is described as a stream of fixed cash flows, i.e. payments or receipts, that
occurs periodically, over time. For example, payment of housing loan, life insurance
premium, rent, etc. There can be two types of annuities, i.e. ordinary annuity and annuity
due. Ordinary annuity means an annuity which is related to the period preceding its date,
whereas annuity due is the annuity related to the period following its date.
Most of the people use an annuity as a retirement tool (pension) that guarantees steady
income in the coming years. An equal amount should be paid or received as an annuity
and the time lag between payments occurring consecutively should be same.
There is a difference between ordinary annuity and annuity due which lies in the timing
of the two annuities. So, the article makes an attempt to shed light on the differences
between the two, have a look.
Content: Ordinary Annuity Vs Annuity Due
1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart
Basis for
Ordinary Annuity Annuity Due
Comparison
Ordinary annuity is one in which the Annuity due is described as the
Meaning inflow or outflow of cash fall due for series of cash flows occurring at
payment at the end of each period. the beginning of each period.
Belongs to the period preceding its Belongs to the period following its
Payment
date. date.
Appropriate
Payments Receipts
for
Housing loan, payment of mortgage, Rental lease payments, life
Example
coupon bearing bonds, etc. insurance premium, etc.
Definition of Ordinary Annuity
Ordinary Annuity is defined as a series of regular payments or receipts; that occurs at

regular intervals over a specified number of periods. It is also known as annuity regular
or deferred annuity.
In general, ordinary annuity payment is made on a monthly, quarterly, semi-annual or

annual basis. The present value of the ordinary annuity is computed as of one period
prior to the first cash flow, and the future value is computed as of the last cash flow.
Formula:
 Present Value (PV) of ordinary annuity: PMT × ((1 – (1 + r) ^ -n ) / r)

where, PMT = Period cash payment
r = Interest rate per period
n = Total number of periods
Definition of Annuity Due

Annuity Due or immediate is nothing but the sequence of periodic cash flows (payments
or receipts) regularly occurring at the end of each period overtime. The first cash flow of
the annuity falls due at the present time. The most common example of an annuity due is
the rent, as the payment should be made at the start of the new month.
As in the case of an ordinary annuity, the present and future values of the annuity due
are also calculated as first and last cash flows respectively.
Formula:
 Present Value (PV) of Annuity Due: PMT + PMT × ((1 – (1 + r) ^ -(n-1) / r)

where, PMT = Period cash payment
r = Interest rate per period
n = Total number of periods
Key Differences Between Ordinary Annuity and Annuity Due
The points given below are noteworthy, so far as the difference between ordinary annuity
and annuity due is concerned:
1. Ordinary annuity refers to the sequence of steady cash flow, whose payment is to
be made or received at the end of each period. Annuity due implies the stream of
payments or receipts which fall due at the beginning of each period.
2. Each cash inflow or outflow of an ordinary annuity is related to the period
preceding its date. On the contrary, an annuity due, represent the cash flow
period following its date. As the cash flows belonging to annuity due occur one
period earlier than that of an ordinary annuity.
3. An ordinary annuity is best when an individual is making payment whereas
annuity due is appropriate when a person is collecting payment. As the payment
made on annuity due, have a higher present value than the regular annuity. This is
because of the principle of time value of money, i.e. the value of one rupee, today
is greater than the value of one rupee, after one year.
4. Payment of car loan, payment of mortgage and coupon bearing bonds are some
examples of an ordinary annuity. On the flip side, the common examples of an
annuity due are rental lease payments, car payments, payment of life insurance
premium and so on.
Conclusion
Annuity aims at providing a constant stream of income to the annuity holder for a long
time. An individual can make a choice between these two annuities considering some
factors, such as the income that he wants during retirement and the degree of risk he is
able to take.

Comparison Chart Key Differences Conclusion

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Difference Between Ordinary Annuity and Annuity Due

Last updated on January 5, 2018 by Surbhi S

Content: Ordinary Annuity Vs Annuity Due

Definition of Ordinary Annuity

Ordinary Annuity is defined as a series of regular payments or receipts; that occurs at

In general, ordinary annuity payment is made on a monthly, quarterly, semi-annual or

 Present Value (PV) of ordinary annuity: PMT × ((1 – (1 + r) ^ -n ) / r)

Definition of Annuity Due

 Present Value (PV) of Annuity Due: PMT + PMT × ((1 – (1 + r) ^ -(n-1) / r)

Key Differences Between Ordinary Annuity and Annuity Due

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