What is Annuity Due
Annuity due is an annuity whose payment is due immediately at the beginning of each period. A common example of an annuity due payment is rent, as landlords often require payment upon the start of a new month as opposed to collecting it after the renter has enjoyed the benefits of the apartment for an entire month.
What Is An Annuity?
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 recurring issuance of money upon the beginning of a period. Alternatively, an ordinary annuity payment is a recurring issuance of money at the end of a period. Contracts and business agreements outline this payment, and it is based on when the benefit is received. When paying for an expense, the beneficiary pays an annuity due payment before receiving the benefit, while the beneficiary makes ordinary due payments after the benefit has occurred.
The timing of an annuity payment is critical based on opportunity costs. For an individual collecting payments, the collector may invest an annuity due payment collected at the beginning of the month to generate interest or capital gains. This is why an annuity due is more beneficial for the recipient as he has the potential to use funds faster. Alternatively, individuals paying an annuity due lose out on the opportunity to use 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 because the beneficiary must pay at the beginning of the billing period. Insurance expenses are typically annuities due as the insurer requires payment at the start of each coverage period. 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. One can accomplish this by using 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.