Annuity Due

What You Really Need To Know

The term annuity which is also used in some theories of finance is known as the course of payment that is made over a determined period of time to abolish the debt. This value will include the interest rate applicable on the initial amount. Examples of annuities may include your monthly mortgage bill on your home, the deposits of your recurrent deposit savings account, monthly insurance bills and so on.

This will all be periodical as per your choice like yearly, monthly, weekly or quarterly payments. Also the dates of these payments would be established beforehand.

There are about four categories of annuities including ordinary annuities, annuities due, fixed annuities and stretch annuities.

Annuity due are the second and popular category. In case of the first category, Ordinary annuity, the fixed payments that you need to pay every month are at the compound interest rate that is similar to the initial payment and you need to pay at the end of each interval. But in annuity due, the payment happens at the beginning of the interval.

Some of the examples that fall under annuity due are your rent payments, payment against savings deposit, insurance premium, etc. Here the actual payment is a grant to aggregate over the extra period. So the amount you will be paying will be equal to the amount that follows the ordinary annuity and is multiplied by one.

Formulae to Calculate Annuities Due:

Here the annuity payment is left to compound for extra one period. Hence the value of annuities due is equal to the appropriate ordinary annuity multiplied by (1+i). So, the subsequent annuities due payment can be calculated with the following formula.

S = R [(1+i) ^ (n+1) – 1 / i] – R

This formula can also be written as

S = R [(1+i) ^ n – 1 / i] (1+i) – R

Here one should note that

i = r / m & n = t * m

The following is the legend to the formulae used to calculate the annuities due above.

S = Future value of an annuity that needs to be paid.

R = the intermittent payment against an annuity.

r = nominal interest rate that is to be paid on yearly basis.

t = total number of years.

m = number of time periods in a year.

i = the interest rate that is applicable per period.

n = the number of periods.

Annuities due with n number of payments equal the sum of one ordinary annuity payment now and minus the one ordinary annuity payment. This is also equal the ordinary annuity payment minus the last payment with respect to the time shift.

Though the formulae looks complicated it is actually very easy to pay annuities due as you are paying it at the start of the period rather than at the end. Also this category of annuity payment is widespread and used almost everywhere including your bank, home and life insurance provider.

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