The main difference between an ordinary annuity and an annuity is that in an ordinary annuity, payments are made at the end of each period whereas in an annuity due, payments are made at the beginning of each period.
Before we move to more differences, let’s first understand Ordinary Annuity and Annuity Due:
- Ordinary Annuity: An Ordinary Annuity is a series of equal payments made at the end of each period for a fixed number of periods. It is also known as an end-of-period annuity.
- Annuity Due: An Annuity Due is a series of equal payments made at the beginning of each period for a fixed number of periods. It is also known as a start-of-period annuity.
Now, let’s get to Ordinary Annuity vs Annuity Due:
Major differences between Ordinary Annuity and Annuity Due
|Ordinary Annuity||Annuity Due|
|Payments are made at the end of each period in an Ordinary Annuity.||Payments are made at the beginning of each period in an Annuity Due.|
|The value of an Ordinary Annuity payment is less than an Annuity Due payment because it has one less period of interest.||The value of an Annuity Due payment is higher because it includes an additional period of interest.|
|For Ordinary Annuity, the interest calculations are based on the ending balance of each period.||The interest calculations for Annuity Due are based on the beginning balance of each period.|
|Formula for calculating future value includes one fewer period due to the timing difference.||Formula for calculating future value includes all periods due to the timing difference.|
|Examples of Ordinary Annuities include rent payments, mortgage payments, and car payments.||Examples of Annuities Due include insurance premiums and lease payments.|
So, these are the main differences between the entities.
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