What are annuity payments

what are annuity payments

What is an annuity due?

An annuity due is a repeating payment that is made at the beginning of each period. It 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 quarter 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).

Because 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.

Here are several examples 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.

  • 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.

The annuity due concept is less common than the ordinary annuity concept, since most payments are made at the end of a period, not the beginning.

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Source: www.accountingtools.com

Category: Bank

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