Question

1. There are two kinds of annuities. One is an ordinary annuity, which means the same amount of payment occurred at the end of each time period. The other is an annuity due, which means the same amount of payment occurred at the beginning of each time period. In the real world, what is the example of an ordinary annuity? What is the example of an annuity due? Which annuity is more common?

2. There are different ways to solve time value of money (TVM) problems. You can solve TVM problems by using (1) formulas or (2) Excel or (3) financial or graphing calculator's finance functions. Which way do you prefer? Why? Are the chapter materials helpful for you to learn the way you prefer?

Answer 1

1)The best example of ordinary annuity would be the coupon payment which is paid by the bond issuer to the bond holder and another example of annuity due would be the rent payment. In most countries the rent is paid at the beginning of the month or week or years. IN real world scenario the ordinary annuity is most common because most of the investment make payments at the end of the period and even the borrower or lender is more comfortable with the end of period payment despite some advantage to one party if we consider the time value of money.

2) I believe excel is more useful for TVM calculation than any other method because on the excel spreadsheet the formulas are easily visible also so the probability of making mistakes in inputting the variables is low and also the spreadsheet gives larger space than other methods. (not aware which chapter) These days colleges have given options to students and in some college curriculum it is mandatory to submit the solutions online in excel online so excel can help but still the focus of colleges in major parts of the world remains on manual methods or calculator.