Ordinary Annuity

A series of equal payments made at the end of each period over a fixed amount of time. While the payments in an annuity can be made as frequently as every week, in practice, ordinary annuity payments are made monthly, quarterly, semi-annually or annually. The opposite of an ordinary annuity is an annuity due, where payments are made at the beginning of each period.

Examples of ordinary annuities are interest payments from bond issuers, which are generally paid semi-annually, and quarterly dividends from a company that has maintained stable payouts for years. The present value of an ordinary annuity is largely dependent on the prevailing rate of interest. Because of the time value of money, rising interest rates will reduce the present value of an ordinary annuity, while declining interest rates will increase its present value. This is because the value of the annuity is based on what return you can get elsewhere. If you can get a higher interest rate somewhere else, the value of the annuity in question goes down. Most testing questions will be based on an ordinary, so you need to be careful that your calculator is not in annuity due mode, usually denoted with "BEG" (representing beginning).


Investment dictionary. . 2012.

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