Annuity due definition
/What is an Annuity Due?
An annuity due is a repeating payment that is made at the beginning of each period, such as a rent payment. Since there are usually a number of these payments, the recipient may want to use a discount rate to derive the present value of a series of these payments. Since payments are made sooner under an annuity due than under an ordinary annuity (where payments are made at the end of each period), an annuity due has a higher present value than an ordinary annuity. For example, someone receiving an annuity due (at the beginning of a month) would have use of the cash for (on average) 30 days before someone receiving the same amount that is structured as an ordinary annuity. This accelerated payment could then be invested in the interim, thereby earning more money for the recipient.
The annuity due concept is less common than an ordinary annuity, since most payments are made at the end of a period, not the beginning.
The Characteristics of an Annuity Due
An annuity due has the following characteristics:
All payments are in the same amount (such as a series of payments of $500).
All payments are made at the same intervals of time (such as once a month or year).
All payments are made at the beginning of each period (such as payments being made only on the first day of the month).
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Examples of an Annuity Due
As an example of an annuity due, a company acquires a copier through a lease that requires a payment of $250 at the beginning of each month for three years. Since all payments are in the same amount ($250), they are made at regular intervals (monthly), and the payments are made at the beginning of each period, the payments are an annuity due.
As another example of an annuity due, a company enters into an office lease, under which the lessor requires the company to make monthly payments of $12,000 for the next 24 months, no later than the beginning of the month to which each payment applies. Since all payments are in the same amount ($12,000), they are made at regular intervals (monthly), and the payments are made at the beginning of each period, the payments are an annuity due.
FAQs
Is an Annuity Due More Valuable than an Ordinary Annuity?
An annuity due is more valuable than an ordinary annuity because payments are made or received at the beginning of each period instead of the end. This earlier timing allows each payment to earn an additional period of interest or benefit. As a result, the present and future values of an annuity due are higher than those of an ordinary annuity with the same terms.
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