24.5.1. Types of Annuities

Try these first

1. 1.

   Define an ordinary annuity.

   Hint

   Consider the timing of payment in this type of annuity.

2. 2.

   What is the main difference between an annuity due and an ordinary annuity?

   Hint

   Think about when payments occur for each type.

3. 3.

   What is an ordinary annuity?

   • Payments at the beginning of the period
   • Payments at the end of each period
   • Payments are made monthly

   Hint

   Think about when these payments occur.

4. 4.

   Is the following statement true or false? 'An annuity due provides less total interest earned compared to an ordinary annuity.'

   • True
   • False

   Hint

   Consider when payments are made.

5. 5.

   You have invested in an ordinary annuity that pays ₹15,000 per year for 10 years at an interest rate of 6%. Calculate the future value at the end of 10 years.

   Hint

   Make sure to apply the FV formula for the ordinary annuity correctly.

6. 6.

   Calculate the present value of an annuity due that pays ₹8,000 per year for 5 years with a discount rate of 5%.

   Hint

   Remember, you need to factor in the '1 + r' for annuity due.