What is a key difference between an ordinary annuity and an annuity due?

The key difference between an ordinary annuity and an annuity due lies in the timing of payments. In an ordinary annuity, payments are made at the end of each period. This means that the first payment occurs at the end of the first period of the annuity. In contrast, an annuity due requires payments to be made at the beginning of each period, which results in the first payment being made immediately.

This difference in timing has significant implications for the calculation of present value and future value. Because payments in an annuity due are made earlier than in an ordinary annuity, the present value of an annuity due will generally be higher than that of an otherwise equivalent ordinary annuity, assuming the same interest rate and number of periods.

Understanding this distinction is crucial for financial accounting and reporting, as it affects cash flow analysis and various financial calculations related to time value of money.