Annuity Due beginning, something, ordinary, payments

cyber21

I wanted to make sure my thinking is on the right lines on this...


If it an annuity due then while calculating we always take N = no of periods -1 as the first payment is at t=0 and for an ordinary annuity N= number of periods??

I was a little confused after reading Schweser.. They had taken N=no of periods even for payments occuring at the beginning of the year and calculated the PV. They had then cacluated the PV(1+i) to get the right present value?

Am i getting something wrong here.. Can someone clarify?

lc26mizzou

Not exactly sure what your question is...but

PV of Annuity due = PV of Ordinary Annuity x (1+r)

Also,

FV of Annuity due = FV of Ordinary Annuity x (1+r)

Basically, the PV and FV of annuity dues are always bigger than the ordinary annuity since the first cash flow is coming in sooner.

kmf229

manasib Wrote:
-------------------------------------------------------
> I wanted to make sure my thinking is on the right
> lines on this...
>
>
> If it an annuity due then while calculating we
> always take N = no of periods -1 as the first
> payment is at t=0 and for an ordinary annuity N=
> number of periods??
>
> I was a little confused after reading Schweser..
> They had taken N=no of periods even for payments
> occuring at the beginning of the year and
> calculated the PV. They had then cacluated the
> PV(1+i) to get the right present value?
>
> Am i getting something wrong here.. Can someone
> clarify?

I think it works either ways. There are basically three ways to calculate this, one in which you can set the calculator in begin mode and process as you would do in case of ordinary annuity, second by calculating ordinary annuity for the same number of periods and multiplying by (1+r), or calculate for n-1 and add first payment. Look at this example I think it will give you a clear picture:

PV of a ordinary annuity for 3 payments 3 years from now at 10% would be:
100/1.1+100/1.1^2+100/1.1^3
Calculator values: N=3, PMT=100, I/Y=10%, CPT-->PV

1st Method:
Calculator in the begin mode: N=3, PMT=100, I/Y=10%, CPT-->PV

2nd Method:
PV*(1+r)==>(100/1.1+100/1.1^2+100/1.1^3)*1.1

3rd Method:
results from the second method==>100+(100/1.1+100/1.1^2)==>first payment +two year ordinary equity

I am not sure how well I could illustrate here but you get an idea. I wish I could show you on timeline.