Which of the following best describes the difference between an annuity due and an ordinary annuity?

Question

BlackTom AI · Accepted Answer

The question asks for the best description of the difference between an annuity due and an ordinary annuity.

First, I note that the provided data includes the question and a single answer string, but there are no answer options listed to evaluate. Without the option choices, we cannot compare alternatives or identify which one matches the standard distinction.

Conceptual background to address the topic: an ordinary annuity is a stream of equal payments made at the end of each period (for example, payments at the end of each month). In contrast, an annuity due has payments at the beginning of each period (for example, payments at the start of each month).

Why this difference matters: timing affects the value of the cash flows. Because payments in an annuity due occur earlier, each payment can earn interest sooner, which generally makes the present value (PV) and future value (FV) of an annuity due higher than those of an ordinary annuity with the same payment amount, rate, and number of periods.

If we consider a simple example: with a monthly payment of $100 for 12 months at the same interest rate, the annuity due’s first payment is received immediately, while the ordinary annuity’s first payment is received one month later. This seemingly small timing shift accumulates over time due to compounding.

Given the standard definitions, the statement that best describes the difference is: ordinary annuity pays at the end of the period, while an annuity due pays at the beginning.

However, since there are no listed answer options in the provided data, we cannot critique or distinguish among alternative phrasings or potential misconceptions that multiple-choice distractors might introduce.

In summary, the core distinction is purely about timing of payments within each period: end-of-period for ordinary annuity vs. beginning-of-period for annuity due, with the timing difference impacting the value calculations via discounting or compounding.

MSB-250-300-002 Topic 5 Quiz

Which of the following best describes the difference between an annuity due and an ordinary annuity?

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