# Understanding Ordinary Annuities: Definition, Examples, and Calculation

> **Definition**
>
> An ordinary annuity is a series of equal payments made at the end of a time period for a fixed amount of time. Bond dividend payments are an example.

## What Is an Ordinary Annuity?

An ordinary annuity is a financial product that consists of equal payments at set periods. Unlike an annuity, an ordinary annuity pays out at the end of the period, which can be monthly, quarterly, semi-annually, or annually. The present value of ordinary annuities can fluctuate. For instance, the interest payment on a bond is an ordinary annuity.

### Key Takeaways

*   An ordinary annuity involves equal payments made at the end of regular intervals, like bond interest or stock dividends.
*   Annuity due payments are made at the beginning of each period, such as rent payments.
*   Rising interest rates decrease the present value of an ordinary annuity due to the time value of money.
*   The present value of an annuity due is generally higher than that of an ordinary annuity.
*   An ordinary annuity doesn't refer to the insurance product 'annuity' but involves similar periodic payments.

![Ordinary Annuity: A series of equal payments made at the end of each period over a fixed amount of time.](https://www.investopedia.com/thmb/7kSZtYFY1hWm1NacVgz9otWsWKM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ordinaryannuity.asp-final-536dc12bdab24bf683faee7d44dcb5ad.png)

*— Investopedia / Zoe Hansen*

## Understanding the Mechanics of Ordinary Annuities

An example of an ordinary annuity is the interest payment on a bond. These are generally made semiannually. Regular quarterly dividends from a stock that has maintained a stable payout level for years are another example.

The [present value](https://www.investopedia.com/terms/p/presentvalue.asp) of an ordinary annuity is largely dependent on the prevailing interest rate.

Rising interest rates decrease the present value of an ordinary annuity, while declining interest rates increase it, due to the [time value of money](https://www.investopedia.com/terms/t/timevalueofmoney.asp) This is because the value of an annuity is [based on the return your money could earn elsewhere](https://www.investopedia.com/articles/03/082703.asp). If you can get a higher interest rate somewhere else, the value of the annuity goes down.

## Calculating the Present Value of an Ordinary Annuity: An Example

The present value formula for an ordinary annuity takes into account three variables. They are:

*   PMT = the period cash payment
*   r = the interest rate per period
*   n = the total number of periods

Given these variables, the present value of an ordinary annuity is:

*   **Present Value** = PMT x ((1 - (1 + r) ^ -n ) / r)

If an ordinary annuity pays $50,000 annually for five years at a 7% interest rate, its present value is:

*   **Present Value** = $50,000 x ((1 - (1 + 0.07) ^ -5) / 0.07) = $205,010

> **Important**
>
> An ordinary annuity will have a lower present value than an annuity due, all else being equal.

## Comparing Present Value: Annuity Due vs. Ordinary Annuity

An investor in an ordinary annuity gets paid at the end of the time period.

An alternative is an [annuity due](https://www.investopedia.com/terms/a/annuitydue.asp), in which the investor receives the payment at the beginning of the period. A common example is rent. The renter typically pays the landlord in advance for the month ahead.

The timing difference affects the annuity's value. Here's the formula for an annuity due:

*   **Present Value of Annuity Due** = PMT + PMT x ((1 - (1 + r) ^ -(n-1) / r)

If that annuity were an annuity due, its present value would be:

*   **Present Value of Annuity Due** = $50,000 + $50,000 x ((1 - (1 + 0.07) ^ -(5-1) / 0.07) = $219,360.

An annuity due is [worth more](https://www.investopedia.com/retirement/calculating-present-and-future-value-of-annuities/) than an ordinary annuity because you get the money sooner.

## Is an Ordinary Annuity Better Than an Annuity Due?

Generally, an annuity due is better for the party that is paying and not as good for the recipient. The recipient is paying up front for the period ahead. With an ordinary annuity, the payment is made at the end of the previous period. Money has a [time value](https://www.investopedia.com/articles/03/082703.asp). The sooner a person gets paid, the more the money is worth.

## What Is an Annuity?

The word [annuity](https://www.investopedia.com/terms/a/annuity.asp) commonly refers to an insurance product purchased by an individual. In return for a lump-sum payment or a series of payments to the financial institution, the individual receives a steady stream of regular payments. The annuity is most often used as a source of retirement income.

## What Are the Most Common Types of Ordinary Annuities?

The most common types of ordinary annuities are stock and bond dividends. These are paid at the end of each period of the agreement rather than at the beginning of the period. In the case of stock dividends, this is because the dividends are based on the company's profits for the immediate preceding period.

## The Bottom Line

Ordinary annuity is a business term that describes any regular payment that is made at the end of a relevant cycle rather than at its start. If you have a dividend-paying stock or a bond, you have an ordinary annuity.