Chapter 5: Annuity
Learning Outcomes
At the end of this chapter, you should able to:
- Define the two types of annuity.
- Differentiate between ordinary annuity and annuity due.
- Understand the calculation between the present and future value of ordinary annuity and annuity due.
An annuity is a sequence of equal payments made at equal periods. Example: Insurance premium, mortgage payments, interest payments on bonds, payments of rent, payments on hire purchases, dividends, etc.
There are two types of annuity which are ordinary annuity/ annuity-immediate and annuity due. If the payments are made at the end of the time period, and if the frequency of payments is the same as the frequency of compounding, the annuity is called an ordinary annuity/ annuity-immediate. While annuity due is an annuity whose periodic payments are paid at the beginning of each payment period.
