What defines an ordinary annuity?

An ordinary annuity is defined by the timing of its payments, which occur at the end of each period. This timing is crucial because it affects the present value and future value calculations associated with the annuity. In financial terms, because the payments are made at the end of each period, the amount of interest that can be earned on each payment until the end of the annuity term is less compared to an annuity due, where payments are made at the beginning of each period.

The distinction is important in financial mathematics and in making strategic financial decisions. For example, when calculating the present value of an ordinary annuity, it assumes that you will not receive the payment until the end of the specified period, thereby impacting the discounting process in time value calculations.

In contrast, other choices describe aspects that do not fit the definition of an ordinary annuity: payments at the beginning of each period refer to an annuity due, variable payments would relate to a different or irregular payment structure, and payments based on a percentage of income suggest a more complex or conditional financial arrangement than what is defined by an ordinary annuity.