Question

what is an annuity? Explain why a beginning annuity will always be worth more than an ordinary (ending)annuity?

Answer 1

An annuity is a series of payment of a particular amount. Annuities include, a recurring deposit made to the bank, EMIs paid on a loan, etc. Annuities can be of two types - Beginning annuity and ordinary annuity.

Beginning annuity- In a beginning annuity the payments are made at the start of the year. When calculating the present value of these payment we will get a higher PV because the amount is discounted for 1 less year.

Ordinary annuity- In an ordinary annuity the payments are made at the end of the year. To calculate the present value when these payments are discounted, we get a lower present value as compared to the beginning annuity present value.

Because in a beginning annuity the payments are made at the start of the year as compared to an ordinary annuity, the beginning and it is worth more than an ordinary annuity.

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