Question

In 350 words, explain and provide an example of an Annuities (Ordinary or Annuity Due) and when is it used.

Answer 1

Annuity are regular stream of payments which is payable in cash and which is to be receivable by an individual or payable by an individual at a fixed interval and these annuity are always having a fixed amount. Annuity is always preferred for long term payments and receivables and since it is paid at regular interval and it is paid in a regular fixed amount it will be having a uniformity in its payments and all those parties who are involved with it will be having a high level of certainty in regards to the payments.

Ordinary annuity is a type of annuity in which payments are to be made at the end of the year and these cash flows are to be received or paid at the end of the year and hence a proportion of overall interest will be higher in these payments and net present value of ordinary annuity is lower than annuity due.

Annuity due is another type of annuity in which payment will be made at the beginning of the year and it would be leading to a higher net present value of the total value of the cash streams because there will be presence of time period ,so the amount of overall interest would be lower in this type of annuity but the total amount of net present value would be higher in annuity due.

This type of annuity it will always be helpful for making various kinds of investment decisions and it will also be helpful for various types of loan making process so systematic investment plan is one of the most important type of Annuity, which can either be annuity due or annuity in an ordinary annuity form so they will be preferred by investor in order to make investment into the stock market at regular interval through payment of a fixed amount in form of systematic investment plan.

there will be various insurance premiums and loan amount which can either be annuity due or ordinary annuity based upon nature of payments.