What distinguishes an Annuity Due from an Ordinary Annuity?

An Annuity Due is characterized by payments being made at the beginning of each time period, which is a fundamental distinction from an Ordinary Annuity where payments occur at the end of each time period. This timing difference affects the present value and future value calculations of each type of annuity.

Because payments in an Annuity Due start earlier, each payment has an extra period to accumulate interest compared to the payments of an Ordinary Annuity. As a result, the present value of an Annuity Due is typically greater than that of an Ordinary Annuity when the interest rate and the number of periods are the same. This important distinction is crucial for financial planning and investment decisions, impacting how individuals or organizations evaluate the worth of regular income streams.