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Explain the meaning of this statement: Annuity due differs from ordinary annuity. In case of annuity...

  1. Explain the meaning of this statement: Annuity due differs from ordinary annuity. In case of annuity due, show the required change in the future value and present value equations.
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Answer #1

Ordinary annuity is the series of equal cash flows at the end of each period. Whereas, annuity due is the series of equal cash flows at the beginning of each period.

In case annuity due, interest for an additional period is earned as compared to ordinary annuity. Due to this present value and future value of annuity due is always higher than ordinary annuity.

Present value of annuity due = Present value of ordinary annuity * (1 + Interest rate)
Future value of annuity due = Future value of ordinary annuity * (1 + Interest rate)

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