CandleFocus Glossary Editor
Annuity due is a financial aid mechanism that promises fixed payments over a given period of time, but differs from the ordinary annuity. An ordinary annuity is an agreement wherein payment is made at the end of each period, such as loan payments for a mortgage or car loan. An annuity due, however, is a payment made at the beginning of each period, such as rent paid on the first day of each month. Thus, annuity due payment is due immediately and has to be made at the beginning of each payment period.
The present and future value of an ordinary annuity can be calculated using standard formulas. The formulas for calculating an annuity due are however slightly different as the payment is made at the start of each period. These formulas for annuities due assume periodic payments and assume a set rate of interest in addition to the payments made. The formulas assume that interest is also added or subtracted over each payment period, creating a compound periodical interest effect.
For example, if 10 payments of $1000 are due annually and the interest rate is 6%, then the formula for the present value of an annuity due is:
Present Value of Annuity Due = PMT x (1 – (1+i)^-n) / i
where i=interest rate, n=number of payments and PMT= the amount of the periodic payment.
Once the present value of the annuity due is determined, the future value can be calculated. The formula for calculating the future value of an annuity due is:
Future Value of Annuity Due = PMT x [((1+i)^n)-1] / i
Overall, annuities due must be paid immediately at the start of a payment period, and the formulas for their present and future values account for this. Annuities due is not the same as ordinary annuities, as ordinary annuities are payments made at the end of the period. Examples of annuities due include rent payments at the start of the month while an example of an ordinary annuity is a loan payment such as a mortgage. The formulas for calculating the present and future value of an annuity due also account for the effects of compound interest over each period.
The present and future value of an ordinary annuity can be calculated using standard formulas. The formulas for calculating an annuity due are however slightly different as the payment is made at the start of each period. These formulas for annuities due assume periodic payments and assume a set rate of interest in addition to the payments made. The formulas assume that interest is also added or subtracted over each payment period, creating a compound periodical interest effect.
For example, if 10 payments of $1000 are due annually and the interest rate is 6%, then the formula for the present value of an annuity due is:
Present Value of Annuity Due = PMT x (1 – (1+i)^-n) / i
where i=interest rate, n=number of payments and PMT= the amount of the periodic payment.
Once the present value of the annuity due is determined, the future value can be calculated. The formula for calculating the future value of an annuity due is:
Future Value of Annuity Due = PMT x [((1+i)^n)-1] / i
Overall, annuities due must be paid immediately at the start of a payment period, and the formulas for their present and future values account for this. Annuities due is not the same as ordinary annuities, as ordinary annuities are payments made at the end of the period. Examples of annuities due include rent payments at the start of the month while an example of an ordinary annuity is a loan payment such as a mortgage. The formulas for calculating the present and future value of an annuity due also account for the effects of compound interest over each period.