Professional Courses
Industry-relevant training in Business, Technology, and Design to help professionals and graduates upskill for real-world careers.
Categories
Interactive Games
Fun, engaging games to boost memory, math fluency, typing speed, and English skills—perfect for learners of all ages.
Typing
Memory
Math
English Adventures
Knowledge
Enroll to start learning
You’ve not yet enrolled in this course. Please enroll for free to listen to audio lessons, classroom podcasts and take practice test.
Interactive Audio Lesson
Listen to a student-teacher conversation explaining the topic in a relatable way.
Ordinary Annuity
Unlock Audio Lesson
Let's begin by discussing what an ordinary annuity is. Can anyone tell me when payments are made in this type of annuity?
Payments are made at the end of each period!
Exactly! This timing is crucial because it influences the total interest earned. To remember this concept, think of the acronym 'EAP', where E stands for 'End of Period'. Can anyone give me an example of where you might encounter an ordinary annuity?
A regular loan repayment would be a good example!
Correct! Now, remember that ordinary annuities are typical in loans or investments where the capital can grow between periods.
Annuity Due
Unlock Audio Lesson
Now, let's shift our focus to annuities due. Does anyone know how they differ from ordinary annuities?
Payments are made at the beginning of each period for annuities due!
That's right! And this means the initial payment earns interest for a longer time than those made later. Remember 'BAP' — 'Beginning of Every Period.' Why might someone prefer an annuity due over an ordinary annuity?
I think it could lead to more interest earned overall because of that extra time for the first payment.
Exactly! And this is essential in planning cash flows in scenarios like rent payments or retirement plans.
Perpetuities
Unlock Audio Lesson
Finally, let’s talk about perpetuities. Can anyone explain what a perpetuity is?
It's a series of payments that goes on forever!
Correct! This means that while they can provide continuous income, they also require a unique approach to valuation. Remember 'INF' for 'Infinite Flow'. Why might a financial analyst be interested in perpetuities?
Because understanding their present value can help investors decide on the worth of those endless payments.
Absolutely! Analyzing perpetuities is key when considering long-term investments, especially in cases like public funding or endowment funds.
Introduction & Overview
Read a summary of the section's main ideas. Choose from Basic, Medium, or Detailed.
Quick Overview
Standard
Annuities are essential financial instruments involving a series of equal payments made at regular intervals. This section distinguishes between ordinary annuities, annuities due, and perpetuities, explaining how these different types may impact financial calculations and decisions.
Detailed
Types of Annuities
An annuity represents a series of equal payments made over a specified interval. This section introduces three primary types of annuities:
- Ordinary Annuity: Payments are made at the end of each period. It’s commonly used in loans and investments, as the final interest calculation is straightforward since it considers the total duration of investment leading to an accumulated interest effect up until the last period.
- Annuity Due: Payments are made at the beginning of each period. This type generally yields a higher return than an ordinary annuity because the initial payment has more time to earn interest compared to subsequent payments.
- Perpetuity: An infinite series of payments that continues forever. This type of annuity is unique as it does not have an end date, which requires specific valuation techniques, often using present value calculations to determine the worth of these ongoing payments today.
These distinctions are crucial in finance, affecting how future cash flows are calculated and evaluated.
Youtube Videos
Audio Book
Dive deep into the subject with an immersive audiobook experience.
Ordinary Annuity
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Ordinary Annuity – Payments made at the end of each period.
Detailed Explanation
An ordinary annuity is a type of annuity where payments are made at the end of each period. This means that if you are receiving or making payments, those payments occur after the period has concluded. For example, if you have an ordinary annuity that pays you $100 each year, you will receive that $100 at the end of each year.
Examples & Analogies
Think of it like receiving your salary at the end of the month. You work for a month, and then you get paid at the end of that month. In this case, the end of the month represents the end of the period.
Annuity Due
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Annuity Due – Payments made at the beginning of each period.
Detailed Explanation
An annuity due is slightly different from an ordinary annuity. In this case, payments are made at the beginning of each period. If you have an annuity due that pays you $100 each year, you would receive the $100 at the start of each year, rather than at the end.
Examples & Analogies
You can think of this as paying rent. When you move into an apartment, you often have to pay the first month’s rent upfront before you even start living there for that month. This upfront payment represents an annuity due, as it is made at the beginning of the rental period.
Perpetuity
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Perpetuity – Infinite series of payments.
Detailed Explanation
A perpetuity is a special type of annuity that pays out an infinite series of payments. This means that the payments continue indefinitely. Unlike standard annuities that have a set number of payments, a perpetuity has no end. A classic example of a perpetuity is a government bond that pays interest forever.
Examples & Analogies
Imagine a magical money tree that gives you $100 every year for eternity. As long as you own the tree, you will never run out of payments! This represents the core idea behind a perpetuity – continuous, endless payments without a defined limit.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
-
Ordinary Annuity: Payments are made at the end of each period, commonly seen in loans.
-
Annuity Due: Payments occur at the beginning of each period, leading to potentially more interest earned.
-
Perpetuity: A series of payments without an end, requiring specific valuation methods.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
-
If you were to receive ₹10,000 at the end of each year for 5 years, that is an ordinary annuity.
-
If you have to pay ₹5,000 at the start of every year for the next 10 years, that's an annuity due.
-
A perpetuity example would be a scholarship fund that pays ₹1,000 annually forever.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
🎵 Rhymes Time
-
For payments that you need to cue, remember it's due, when it’s ‘due’ at the start for you.
📖 Fascinating Stories
-
Imagine you have a magical bank that pays you ₹1,000 every year, but one type pays you at the end of the year making it a little less magical than when they pay you at the beginning.
🧠 Other Memory Gems
-
BAP (Beginning of each period for annuity due) and EAP (End of each period for ordinary annuity).
🎯 Super Acronyms
PAP for Perpetuity – Payments Always Persist.
Flash Cards
Review key concepts with flashcards.
Glossary of Terms
Review the Definitions for terms.
-
Term: Ordinary Annuity
Definition:
Payments made at the end of each period.
-
Term: Annuity Due
Definition:
Payments made at the beginning of each period.
-
Term: Perpetuity
Definition:
An infinite series of equal payments.