ordinary annuity


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Related to ordinary annuity: Annuity due

Ordinary Annuity

An annuity with payments that are made at the end, rather than at the beginning, of a period. For example, an ordinary annuity may require payments at the end of the month instead of at the beginning. Many credit cards have ordinary annuity payments, while most lease agreements, for example, do not.

ordinary annuity

An annuity that makes payments at the end of each period. Compare annuity due.

ordinary annuity

A series of equal payments, made at the end of each payment period. Contrast with annuity due, which is a series of equal payments made at the beginning of each period. A mortgage payment is an ordinary annuity, because the payment is made after a month's worth of interest has accrued. Rent payments are annuities due, because payment is made in advance at the beginning of each month. The difference is important for proper formula entries in financial calculators, or for Excel, as the formula is slightly different if the payments are ordinary annuities or annuities due.

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Analogous to the derivation of the present value of an annuity due formula, the future value of an annuity due formula is just the future value of an ordinary annuity formula multiplied by (1 + r):
The formula for determining the periodic payment of an annuity with payments at the beginning of each period is the same as the formula for the ordinary annuity, except that the denominator is multiplied by (1 + r).
The Pmt for an ordinary annuity based upon the future value is derived in a manner analogous to the case when it is based upon the present value by rearranging equation FV2:
Number of Periods Present Value Will Provide Ordinary Annuity Payments
Equation N2 calculates the number of periods a given lump sum investment earning some specified periodic rate of return can sustain a specified level of ordinary annuity payments before the fund is exhausted.
Chapter 32 Time value concepts
The present after-tax value one needs to invest in a nondeductible, tax-deferred investment to generate a series of periodic level after-tax ordinary annuity payments cannot be simplified to a single reduced-form equation similar to the future after-tax value formula.
The formula to determine the present before-tax value one needs to invest in a nondeductible currently fully taxable investment to generate after-tax ordinary annuity payments is:
The future after-tax value of ordinary annuity payments is:
The future value before paying the tax on capital gains or tax-deferred returns of ordinary annuity payments is:
Appendix K Additional time value concepts

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