An ordinary annuity is a series of periodic payments made at the end of a fixed period, such as a mortgage or bond. It is also known as an annuity in default and can provide a regular stream of income for retirees. The payment amount is calculated based on the principal balance, term, interest rate, and future value. An immediate annuity has a single purchase payment, and payments begin immediately.
An ordinary annuity is a series of payments made periodically, at the end of a period, such as a month or a year. An ordinary annuity is generally paid over a fixed period of time. A fixed-rate mortgage is an example of an ordinary annuity, as is a bond with direct coupon payments.
An ordinary annuity is sometimes called an annuity in default. This name is used because payments are made at the end of the monthly or annual period instead of at the beginning. If payments were made at the beginning of the term, the contract would be called an annuity in advance or an annuity due. Annuity payments can also be made quarterly or semi-annually. Bonus payments are often made semi-annually.
The monthly or annual payment amount of an ordinary annuity is calculated from the principal balance and the term of the annuity. The interest rate and the future value of the annuity are also taken into account. Future value provides the total cost of the loan, in the case of a mortgage, or the total return on investment, in the case of a bond. These factors determine the amount of the periodic payment, which is generally fixed during the term of the annuity.
An ordinary annuity is sometimes called an immediate annuity. An immediate annuity is an annuity that has a single purchase payment, rather than multiple purchase payments over time. Annuity payments begin immediately after the purchase of the annuity contract. In the case of a mortgage, the lender provides the principal amount and payments begin at the end of the first full month after closing. In the case of a bond, the investor purchases the bond and coupon payments begin after six months and continue for the life of the bond.
An annuity can also be used to provide a regular stream of income for retired people. These annuities generally do not have a fixed period of time during which they pay, but instead payments will continue for the life of the annuity. There may be a minimum period of time during which payments are made, but they continue for at least as long as the person or, in some cases, a married couple lives. In this case, the age of the beneficiaries is also considered when calculating the payments.
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