Ordinary Annuity
IntermediateAn ordinary annuity is a series of equal payments made at the end of each period, such as the end of each month or year, for a set number of periods.
Most loan repayments and many bond interest payments follow the pattern of an ordinary annuity: you borrow or invest today, and the first payment comes at the end of the first period.
Because each payment arrives at a different time, each has a different value today. Suppose you will receive 1,000 at the end of each year for three years and money can earn 5% a year. The three payments total 3,000, but their combined value today is about 2,723, because later payments are discounted more.
The timing difference matters when comparing with an annuity due, where payments come at the start of each period instead. An ordinary annuity is worth slightly less, because every payment arrives one period later.
Financial calculators and spreadsheet functions assume an ordinary annuity by default unless told otherwise. Understanding which type applies is important when calculating loan payments, retirement income or the value of a stream of future cash flows, as using the wrong timing can lead to small but meaningful errors.
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