Annuities are fixed payments, made or received, that occur at a specific, equal interval, such as every 30 days. In addition to the fixed time between payments, annuities also run for fixed durations, such as one year or five years. Annuity due and ordinary annuity refer to two common ways to structure annuity payments.
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An ordinary annuity calls for payment at the end of each interval. If the annuity calls for three payments over three years, the first payment comes due at the end of the first year. The last payment, which closes the annuity, occurs at the end of the third year. Ordinary annuities accrue less value over time. As no money changes hands until the end of the first interval, less money earns interest over the life of the annuity.
An annuity due calls for payment at the beginning of each interval. Using the same three year- three payment example, the first payment comes due immediately. The last payment comes due at the beginning of the third year, but the annuity doesn't close until the end of the third year. An annuity due accrues more value over time, as more money spends more time earning interest over the life of the annuity.