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An ordinary annuity is a series of payments that are made periodically, at the end of a period such as a month or a year. An ordinary annuity is usually paid over a fixed period of time. A mortgage with a fixed mortgage rate is an example of an ordinary annuity, as is a bond with straight coupon payments.
An ordinary annuity is sometimes called an annuity in arrears. This name is used because the payments are made at the end of the monthly or annual period rather than at the beginning. If payments were made at the beginning of the term, the contract would be called an annuity in advance, or an annuity due. Annuity payments can also be made quarterly or semi-annually. Bond payments are often made semi-annually.
The amount of the monthly payment or yearly payment from an ordinary annuity is calculated from the principal balance and the term of the annuity. The interest rate and the future value of the annuity are also factored in. The future value provides the total cost of the loan, in the case of a mortgage, or the total return on investment, in the case of a bond. These factors determine the amount of the periodic payment, which is typically fixed over the term of the annuity.
An ordinary annuity is sometimes referred to as an immediate annuity. An annuity-immediate is an annuity that has a single purchase payment, rather than multiple purchase payments over time. Annuity payments begin immediately upon the purchase of the annuity contract. In the case of a mortgage, the lender provides the principal amount, and the payments begin at the end of the first full month following the closing. In the case of a bond, the investor purchases the bond and coupon payments begin after six months and continue for the duration of the bond.
An annuity can also be used to provide a regular stream of income for people in retirement. These annuities usually do not have a fixed period of time over which they pay, but rather, the payments will continue as long as the annuitant lives. There may be a minimum period of time for which payments are made, but they continue for at least as long as the person, or, in some cases, a married couple, lives. In this case, the age of the annuitant(s) is also considered when calculating the payments.
I don't understand much about annuities, but know a friend of mine was receiving an annuity payment once a month.
When his mom passed away several years ago, he was the only living child, so was the beneficiary on everything.
Every month he received an annuity payment of $1000. This was a nice source of income for him while it lasted. I think he received this every month for about 10 years.
Now that he no longer receives that payment every month, he had to change his spending habits.
I never realized that a mortgage loan with a fixed rate of interest was an ordinary annuity. I always thought an annuity was an investment product that was sold through a life insurance company.
I also didn't realize you could make payments like this quarterly. Anytime I have made a house payment, it has always been once a month.
Now I understand when I take out a mortgage loan, or refinance my loan why I don't have to make a payment for awhile. Because this is an annuity in arrears, there is about a 2 month period before the payments begin.
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