Which are the two principal types of annuities?

Annuities can be classified into several types, but the two principal categories that stand out are the ordinary annuity and the annuity due. An ordinary annuity involves payments that are made at the end of each period, such as monthly or annually. This structure is beneficial when considering cash flows that are received after a designated time frame.

On the other hand, an annuity due requires payments to be made at the beginning of each period. This is particularly advantageous for situations where immediate cash flow is necessary or the value of money needs to be maximized since each payment has a longer duration to earn interest.

Understanding these distinctions is crucial for individuals or businesses when planning for investments, retirement funds, or any financial planning that involves annuitized payments. Recognizing how the timing of payments affects value can influence decision-making regarding cash flows and present value calculations.