Annuity Due: Equal Payments Made at the Beginning of Each Period

An annuity due is a series of equal cash flows that occur at the beginning of each period.

That timing detail is the whole point.

If two cash-flow streams have the same payment size and the same number of periods, the annuity due is worth more than an otherwise identical ordinary annuity because every payment happens one period sooner.

An annuity due moves every payment one period earlier. That makes each payment more valuable in present-value terms and gives each payment one extra period to compound in future-value terms.

Annuity Due vs. Ordinary Annuity

The difference is purely timing:

• annuity due: payment at the beginning of each period
• ordinary annuity: payment at the end of each period

Common real-world examples of an annuity due include:

• rent paid at the start of the month
• lease payments due at the start of each period
• some insurance or deposit arrangements paid in advance

Why Timing Changes Value

Earlier cash flows are more valuable because of the time value of money.

Receiving or investing money earlier means:

• it can be used sooner
• it can compound for longer
• it carries less discounting when valued today

That is why both the present value and the future value of an annuity due are higher than those of an equivalent ordinary annuity.

Intuition Without Memorizing Formulas

You do not need to memorize the exact formula first to understand the concept.

Think of it this way:

• every payment in an annuity due is shifted one step earlier
• therefore each payment gets one extra period of value

That is why many formulas for annuity due are just the corresponding ordinary-annuity formula multiplied by one extra growth factor.

Worked Example

Suppose you deposit $1,000 at the beginning of each year for five years at 6%.

Because each deposit enters earlier than an end-of-year deposit, the account balance after five years will be higher than it would be under an ordinary annuity with the same annual deposit amount.

The first payment gets the most extra compounding benefit because it sits in the account the longest.

Where Annuity Due Matters

The concept appears in:

• retirement planning
• lease and rent analysis
• insurance products
• savings plans with advance contributions

In all of these, the financial question is the same: are payments made before the period begins or after it ends?

Related Terms

• Annuity: An annuity due is one timing variant of a level payment stream.
• Present Value: Earlier cash flows increase present value.
• Future Value: Earlier payments also get more time to compound.
• Time Value of Money: The entire difference between annuity due and ordinary annuity comes from timing.

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