Definition
Annuity Due vs Ordinary Annuity
An ordinary annuity pays at the end of each period, while an annuity due pays at the beginning — a timing difference that changes its value.
Because money has time value, payments received at the start of each period (annuity due) are worth slightly more than the same payments received at the end (ordinary annuity), since each instalment is available to invest sooner. Most loan EMIs and bond coupons behave like ordinary annuities; rent and some insurance premiums, paid in advance, behave like annuities due.
The distinction matters when comparing offers or computing the true value of a payment stream. For the same amount and number of payments, an annuity due always has a marginally higher present and future value than an ordinary annuity.
Related terms
- Time Value of MoneyThe time value of money is the principle that a rupee today is worth more than a rupee in the future, because today's rupee can be invested to earn returns.
- Present ValuePresent value is what a future sum of money is worth today, calculated by 'discounting' it at an appropriate rate to reflect the time value of money.
- AnnuityAn annuity is a financial product that pays a regular income stream, typically for life, in exchange for a lump sum — used mainly to secure income in retirement.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.