Annuities are mainly used for retirement purposes, they can be lump-sum payments or a series of payments made at equal intervals.
An annuity is due when payments are made at the beginning of the period. In contrast, the ordinary annuity is where payments are made at the end of the period.
Annuity Due Formula:
| (1 + i)n - 1 |
| i |
FV = Future value (final amount)
PMT = Payment per period (cash flow per period)
i = Interest rate
n = Number of payments
Ordinary Annuity Formula:
| (1 + i)n - 1 |
| i |
If the periodic payment doesn't match the compounding frequency
Annuity Due Formula:
| [(1 + i)(CY ÷ PY)]n - 1 |
| (1 + i)(CY ÷ PY) - 1 |
Ordinary Annuity Formula:
| [(1 + i)(CY ÷ PY)]n - 1 |
| (1 + i)(CY ÷ PY) - 1 |
Where:
CY = Compounds per year (compounding frequency)
PY = Payments per year (payment frequency)