Business Accounting and Bookkeeping

Annuities

Retirement Planning

# Differentiate between ordinary and annuity due?

###### Wiki User

###### 2008-02-01 21:05:15

annuity means the contract between a individual and insurer,

where a individual makes payment some premium at the time of

accumulation period to the insurer.

## Related Questions

###### Asked in Annuities, Retirement Planning

### Differentiate between ordinary annuity and annuity due?

In an ordinary annuity, the annuity payments are fed into the
investment at the END of the year. In an annuity due, the payments
are made at the BEGINNING of the year. Therefore, with an annuity
due, each annuity payment accumulates an extra year of interest.
This means that the future value of an annuity due is always
greater than the future value of an ordinary annuity.
When computing present value, each payment in an annuity due is
discounted for one less year (because one of the payments is
not made in the future- it is made at the beginning of this year
and is already in terms of present dollars). This will result in a
larger present value for an annuity due than for an ordinary
annuity, as well.

###### Asked in Business & Finance, Annuities, Retirement Planning

### What is the difference between ordinary annuity and annuity due?

In an ordinary annuity, the payments are fed into the investment
at the END of the year. In an annuity due, the payments are made at
the BEGINNING of the year. Therefore, with an annuity due, each
annuity payment accumulates an extra year of interest. This means
that the future value of an annuity due is always greater than the
future value of an ordinary annuity.
When computing present value, each payment in an annuity due is
discounted for one less year (because one of the payments is
not made in the future- it is made at the beginning of this year
and is already in terms of present dollars). This will result in a
larger present value for an annuity due than for an ordinary
annuity, as well.

###### Asked in Annuities, Retirement Planning

### How can you convert the present value of an ordinary annuity into the present value of annuity due?

The simplest way is to gross up the ordinary annuity (payments
in arrears) by a single period at the discounting rate.
For example, if the ordinary annuity has semi-annual payments
(half yearly) and the PV is $1000 using a discounting rate of 5%
p.a., then the PV of the annuity due would be:
PVDue= $1,000 x ( 1 + 5%/2 ) = $1,025

###### Asked in Annuities

### How do you calculate annuity payments?

An annuity is a series of equal cash flows over time that comes
at regular intervals. The cash flows must be either all payments or
all receipts, consistently occur either at the beginning or the end
of the interval and represent one discount period. Payments made at
the beginning of the period indicate an "annuity due" which can
include rents and insurance payments. Payments at the end of the
period indicate an "ordinary annuity" which include mortgage
payments, bond payments, etc.
Although loan payments, mortgages and similar financial
instruments can be regarded as an annuity, the term is mostly
applied from the perspective of being an asset. For example,
payments from a lottery or distributions from a lump-sum amount can
be considered as an annuity. Annuities can also be an investment
used to guarantee a regular income during a retirement.
Calculating annuity payments can come from two perspectives: the
future value of an annuity or the present value of an annuity.
Calculating
Ordinary Annuity Payments From Future Value
If the desired ending amount is known together with the discount
rate and number of periods, the payments can be calculated as
follows:
PMT = FV / (((1 + r)^n - 1) / r)
Where:
PMT = Payment amount made at the end of the period
FV = The future value of the annuity (how much the balance will
be after all payments have been made)
r = the discount rate
^ = raises the value to the left to an exponential number on the
right
n = the number of payments
In this calculation, the present value (PV) is assumed to be
zero.
Calculating
Ordinary Annuity Payments From Present Value
If the sum of money or balance on hand is known together with
the discount rate and the number of periods, the amount of payments
to reduce the balance to zero can be calculated as follows:
PMT = PV / ((1-[1 / (1 + r)^n] )/ r)
Where:
PMT = Payment amount made at the end of the period
PV = The present value of the annuity (how much is currently on
hand)
r = the discount rate
^ = raises the value to the left to an exponential number on the
right
n = the number of payments
In this calculation, the future value (FV) is assumed to be
zero.
Calculating
Annuity Due Payments From Future Value
Because the payment earns interest for one additional period
than the ordinary annuity, the future value should be adjusted as
follows:
FV annuity due = FV ordinary annuity X (1+r)
The new value for future value can now be inserted in the
original equation to compute the annuity due payments.
Calculating
Annuity Due Payments From Present Value
To remove the additional discount period for each payment made
on an annuity due, the present value of the annuity must be
adjusted as follows:
PV annuity due = PV ordinary annuity X (1+r)
The new value for future value can now be inserted in the
original equation to compute the annuity due payments.
Alternate Methods
Because calculating the payments for ordinary annuities and
annuities due, a financial calculator such as the HP 10bII can be
used to simplify the process. When many calculations must be
performed, the process can be expedited through the use of a
spreadsheet such as Microsoft Excel which is equipped with time
value of money functions.
See the related links below for an annuity calculator for
different types of contracts that compute the balance,
distributions, or present value using the amounts you specify.

###### Asked in Annuities, Retirement Planning

### What is a deferred annuity?

An annuity that will not begin until some time period in the
future.
A deferred annuity is an annuity in which the taxes due on any
taxable portion is deferred until you start to withdraw from the
annuity. It is a way of compounding interest on the money you would
normally paid taxes on if not in a ta deferred annuity. In a way it
is like using the government's money to make you money.

### Fixed Annuity Calculator?

Fixed Annuity Calculator
A Fixed Annuity can provide a very secure, tax-deferred
investment. It can provide a guaranteed minimum interest rate, with
no taxes due on any earnings until they are withdrawn from the
account. Use this calculator to help you determine how a Fixed
Annuity might fit into your retirement plan.

###### Asked in Annuities

### What does an immediate annuity calculator allow a person to determine?

A Fixed Annuity can provide a very secure, tax deferred
investment. It can provide a guaranteed minimum interest rate, with
no taxes due on any earnings until they are withdrawn from the
account. Use this annuity calculator to help you determine how a
Fixed Annuity might fit into your retirement plan.

###### Asked in Estates, Income Taxes, Annuities, Retirement Planning

### Can a beneficiary inherit an annuity without paying penalties?

This is a complicated area so the following information is
general only. You should speak with a tax expert and a
representative from the insurance company before you make any
decisions regarding this inheritance.
The value of the annuity at the date of death is included in the
estate for tax purposes. The estate would pay any inheritance
tax.
Once an inherited annuity is distributed to the beneficiary by
the insurance company, either a lump sum distribution or a new
annuity with you as the owner, ordinary income tax
will become due on the growth of the annuity from the time
the annuitant/decedent made the initial investment. Most annuities
are tax deferred. When they are inherited, you inherit all the tax
liability that was deferred over the years by the owner of the
annuity.
You should discuss the inheritance with the insurance company.
It can explain your options and ways you can minimize your tax
obligations. Any changes you make or any distribution will generate
a 1099-R.

###### Asked in Science, Electricity and Magnetism

### Ordinary rays and extra ordinary rays?

In case of some crystals such as calcite, when light is passed
through two rays come out giving rise to two images. One is found
to be stationary and the other one is moving around the first as we
rotate the crystal about the line of incidence.
The stationary image is known as ordinary image and the moving
image is extraordinary image. The stationary image is due to
ordinary ray and extra ordinarily moving image is due to extra
ordinary ray.
Ordinary ray obeys all the laws of refraction where as the extra
ordinary does not do so.
This is because the light entered into the crystal has been
polarized.