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what is an annuity? Explain why a beginning annuity will always be worth more than an...

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

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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.

Do let me know in the comment section in case of any doubt.

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