What are annuities?

Annuities are a series of equal amounts of payments or receipts that occur at the
same frequency (either monthly, quarterly, half yearly or annual). The payments
or receipts can happen either at the beginning of the period or at the end of the
period.

Annuities come in three main varieties: Fixed, variable, and indexed. Each type
has its own level of risk and pay-out potential. Fixed annuities pay out a
guaranteed amount. This type of annuity comes in two different styles—fixed
immediate annuities, which pay a fixed amount right now, and fixed deferred
annuities, which pay you later. 

Annuity Due:

An annuity due is an annuity whose payment is due immediately at the

beginning of each period. A common example of an annuity due payment is
rent, as landlords often require payment upon the start of a new month.

Ordinary Annuity:

It is a recurring receipt / payment of money at the end of a period. For example

a person working for a fixed amount of wages which is usually paid on the last
date of the month.

Present value of an ordinary annuity:

Example of Present Value of an Ordinary Annuity

The formula for the present value of annuity is below. (An ordinary annuity
pays interest at the end of a particular period, rather than at the beginning)
Assume a person has the opportunity to receive an ordinary annuity that
pays $50,000 per year for the next 25 years, with a 6% discount rate, or
take a $650,000 lump-sum payment. Which is the better option? Using the
above formula, the present value of the ordinary annuity is:

 Present value of an annuity due:

Example:

Assume a person has the opportunity to receive an annuity due (payment

at the beginning of the period) that pays $50,000 per year for the next 25
years, with a 6% discount rate, or take a $650,000 lump-sum payment.
Which is the better option?
With an annuity due, in which payments are made at the beginning of each
period, the formula is slightly different. To find the value of an annuity due,
simply multiply the above formula by a factor of (1 + r):

In this case, the person should choose the annuity due option because it is
worth $27,518 more than the $650,000 lump sum.

Calculating the Future Value of an Ordinary Annuity

Future value (FV) is a measure of how much a series of regular payments will be
worth at some point in the future, given a specified interest rate. So, for example, if
you plan to invest a certain amount each month or year, it will tell you how much
you'll have accumulated as of a future date. If you are making regular payments on
a loan the future value is useful in determining the total cost of the loan.

Consider, for example, a series of five $1,000 payments made at regular intervals.
(end of the period)
So, let's assume that we invest $1,000 every year for the next five years, at
5% interest. Below is how much we would have at the end of the five-year
period.
Calculating the Future Value of an Annuity Due
An annuity due, you may recall, differs from an ordinary annuity in that the annuity
due's (payment at the beginning of the period) payments are made at the beginning,
rather than the end, of each period.
To account for payments occurring at the beginning of each period, it
requires a slight modification to the formula used to calculate the future
value of an ordinary annuity and results in higher values, as shown below.

The reason the values are higher is that payments made at the beginning
of the period have more time to earn interest. For example, if the $1,000
was invested on January 1 rather than January 31 it would have an
additional month to grow.

The formula for the future value of an annuity due is as follows: