What is due to annuity?

Annuity is payable with an annuity tool where payments are made for a fixed period of time at the beginning of each period. This type of tool can be an investment or loan depending on its purpose and who owns the annuity. Examples of annuity include savings accounts, insurance contracts, housing mortgages and other similar investments. The key point due annience is that payments occur at the beginning of the period that plays an important role in the time value of the concept of money.

The time value of the concept of money shows the impact of interest on money saved for a certain period of time. Banks and other financial institutions offer interest to individuals and businesses as an advantage for saving money to spend them immediately. This concept requires the current value of the initial investment, payments added to the initial balance, interest rate and the length of investment. The future value of money is calculated using the basic time value. This formula can also calculate the current value of the annuity to be backward using this formula.

For example, let's assume the following: The investor places $ 10,000 (USD) on the savings account with an interest rate of 5 %. No additional payments are added to the original balance and the money will remain on the account for 10 years. The investor will receive payments at the beginning of each year because the investment is due to annuity. Based on the formula, the annual payments are equal to $ 1,2338. In contrast, assume that the information is the same, but the investor uses the normal annuity where payments are made at the end of each year. Every year, the investor receives payments of $ 1,295.05, increasing the return on investment by $ 61.67 every year. The difference concerns the interest lost in making payments at the beginning of each year than at the end, resulting in a loss of income.

While the payable annuity seems unfavorable when it comes to another investment account, imagine whether payments have been made by a mortgage or other loan. Use the sameThe information from the above example would save investors $ 61.67 in interest payments by making loans at the beginning of each year, not at the end. During the 10 -year period of the loan, the individual would save $ 616.70 in interest interest using due annuity. This money could be reinvested in order to gain additional interest and add to the wealth of the individual rather than reduce them.