Annuity Due

What Is an Annuity Due?

An annuity due is a series of equal payments made at the start of each period rather than at the end. Rent is a familiar example: tenants often pay at the beginning of the month for the month ahead. Because each payment arrives sooner, an annuity due is worth more in today's money than an otherwise identical ordinary annuity that pays at the end of each period.

How It Works

The timing difference matters because of the time value of money. A dollar received now can be invested and earn a return, so receiving payments earlier increases their present value. Each payment in an annuity due is effectively shifted forward by one period compared with an ordinary annuity.

The present value of an annuity due can be found by adjusting the ordinary annuity figure:

PV (annuity due) = PV (ordinary annuity) × (1 + r)

Here r is the interest rate per period. Equivalently, the first payment is counted in full at time zero, and the remaining payments are discounted as usual.

Example

Suppose someone is to receive $1,000 at the start of each of three years, and the discount rate is 5% per year. The first $1,000 is received immediately and is worth $1,000 today. The second and third payments, discounted one and two years, are worth about $952.38 and $907.03. The total present value is about $2,859.41.

An ordinary annuity with the same payments made at the end of each year would be worth about $2,723.25 today. The difference reflects the extra year of timing for each payment.

Why It Matters to Investors

Annuity due calculations appear in lease valuation, in loan schedules that require payments in advance, and in some retirement income products. Understanding the timing convention helps readers compare offers that look similar but pay on different schedules. The concept also shows how present value changes with timing even when the total amount paid stays the same.