Hello everyone, I have a quick question about an annuity due and the concept of a timeline. I understand that the end of one period is the same as the beginning of the next. However, why is it that for annuity due, I need to solve for year 3 when the payment is in the beginning of year 4? Why not solve for year 4?
You need to specify the question you are trying to solve.
When is the first payment, today?
Are you trying to get PV or FV?
You are solving for whichever year the payment is made at the beginning of, just remember the method of finding the solution is different because this is an annuity due and not an ordinary annuity.
My friend you answered your own question right there “I understand that the end of one period is the same as the beginning of the next.” An annuity due specifies that the payments are made immediately. Therefore if you had to solve for an annuity due which you receive in the beginning of year 4, you have to solve for year 3. if you solve for year 4 you will be factoring in all of the interest recieved in the 4th year, this would be an incorrect assumptuion. (since you are making the payment at the beginning of the 4th period how could you factor in the interest rate of holding the annuity through that period) do you understand my explanation?