Question

Question:What are the primary characteristics of an annuity? Differentiate between an “ordinary annuity” and an “annuity due.”

Short answer

The annuity has periodic payment and rents occur in beginning in annuities due, rents occur at end of the period in an ordinary annuity

Step-by-step solution

Step-by-Step SolutionStep 1 Characteristics of annuity

An annuity involves the following characteristics:

Periodic payments or receipts called rents,

Of the same amount

Spread over equal intervals

With interest compounded once each interval

Difference between an ordinary annuity and annuity due

In ordinary annuities, the rents occur at the end of the intervals but in annuities, due rents occur at beginning of each of the intervals or each time period