how an ordinary annuity works
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 of an ordinary annuity is largely dependent on the prevailing interest rate because of the time value of money rising interest rates reduce the present value of an ordinary annuity while declining interest rates increase its present value this is because the value of an annuity is based on the return your money could earn elsewhere if you can get a higher interest rate somewhere else the value of the annuity goes down present value of an ordinary annuity examplethe present value formula for an ordinary annuity takes into account three variables they are given these variables the present value of an ordinary annuity is for example if an ordinary annuity pays 50 000 per year for five years and the interest rate is 7 the present value would be an ordinary annuity will have a lower present value than an annuity due all else being equal present value of an annuity due examplean investor with an ordinary annuity receives the payment at the end of the agreed time period an alternative is an annuity due 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 this difference in payment timing affects the value of the annuity the formula for an annuity due is as follows if the annuity in the above example was instead an annuity due its present value would be calculated as all else being equal an annuity due is worth more than an ordinary annuity because the money is received earlier 