What is an annuity due?

An annuity due refers to a series of payments made at the beginning of each period, which is a key aspect that distinguishes it from other types of annuities. This timing affects the present value and future value calculations of an annuity due; since payments are made earlier, each payment earns interest for a longer time than payments made at the end of the period, as seen in ordinary annuities.

In financial planning and calculations, recognizing that annuity due payments occur at the start of each period is crucial for accurately determining cash flows and valuations. This structure is commonly used in lease agreements, insurance premiums, and certain pension plans where payments are due at the beginning rather than at the end.

Understanding this definition of an annuity due is essential, particularly in areas like retirement planning, where cash flow timing can significantly impact the total amount of money accumulated over time.