What does 'Annuity Due' mean
Annuity due is an annuity whose payment is to be made immediately at the beginning of each period. A common example of an annuity due payment is rent, as the payment is often required upon the start of a new month as opposed to being collected after the benefit of rent has been received for an entire month.
BREAKING DOWN 'Annuity Due'Annuity due payments received by an individual represent an asset. Meanwhile, the individual paying the annuity due has a legal debt liability requiring periodic payments.
Annuity Due vs. Ordinary Annuity
An annuity due payment is a reoccurring issuance of money upon the beginning of a period. Alternatively, an ordinary annuity payment is a reoccurring issuance of money at the end of a period. This type of payment is outlined in contracts and business agreements, and is based on when the benefit is received. When paying for an expense, an annuity due payment is paid in advance of receiving the benefit, while ordinary due payments are made after the benefit has occurred.
The timing of an annuity payment is critical based on opportunity costs. For an individual collecting payments, an annuity due payment collected at the beginning of the month may be invested to generate interest or capital gains. For this reason, an annuity due is more beneficial for the recipient as he has the potential to utilize funds faster. Alternatively, individuals paying an annuity due lose out on the opportunity to utilize the funds for an entire period. Therefore, those paying annuities prefer ordinary annuities.
Examples of Annuity Due Situations
An annuity due may arise due to any recurring obligation. Many monthly bills, such as rent, mortgages, car payments and cellphone payments, are annuities due if the payment is required at the beginning of the billing period. Expenses for insurance are typically annuities due as the payment is required at the start of each period in which the individual or business is covered. Annuity due situations also typically arise relating to saving for retirement or putting money aside for a specific purpose.
Present Value of Annuity Due Payments
Because a series of annuity due payments reflect a number of future cash inflows or outflows, the payer or recipient of the funds may wish to calculate the entire value of the annuity while factoring in the time value of money. This is accomplished through the use of present value calculations. A present value table for an annuity due has the projected interest rate across the top of the table and the number of periods as the left-most column. The intersecting cell between the appropriate interest rate and number of periods represents the present value multiplier. Finding the product between one annuity due payment and the present value multiplier yields the present value of the cash flow.