# Ordinary Annuity/Annuity Due - SS2

I’m moving through the SS in non-linear fashion. I’m quite clear on the annuity bit or so I thought…have realised I don’t seem to recognise when to use the annuity due ‘formula’. The way I see it 9 years from today implies I have to discount back 9 periods. My rationale is if they said 1 year from today I’d be discounting back 1 period. So why does Schweser and I’m assuming CFAI too discount back 8 periods??

Im not sure if this answers your question, but i think it has to do with how you treat the ‘FV’ input. for example: “You win lotto and will get 20 annual payments of \$200,000 beginning today. What is the PV if the discount rate is 6%” You can either discount it back 19 or 20 periods depending how you treat the FV. Assuming you use a Texas calculator (in BGN mode) you can calculate this either 20 [n] 6 [i/y] 200,000 [PMT] 0 [FV] [CPT] [PV] = -2,431,623.298 or 19 [n] 6 [i/y] 200,000 [PMT] 200,000 [FV] [CPT] [PV] = -2,431,623.298

You should definitely not ignore this question. The easiest way to see this is to actually draw a timeline and write in when the payments will be received. An annuity due receives a payment immediately, so the first payment does not come at the end of the first period, but rather the beginning. Therefore, the first payment is not discounted back.

Ordinary annuity = payments at end of period Annuity due = payments at beginning of period

wyantjs, when you say “annuity due receives a payment immediately” does this imply any TVM problem which mentions “a payment today” is automatically a annuity due [BEG] mode?

When it comes to annuities, this is the point here you need to learn to use a time line. It sounds almost insultingly simple, but start using it here to visulaize what you are discounting and for how many periods, becuase you’ll need it for PV/FC calcs on more complex inflow/outflow analyses (in L2, I believe).

aks1985 Wrote: ------------------------------------------------------- > wyantjs, when you say “annuity due receives a > payment immediately” does this imply any TVM > problem which mentions “a payment today” is > automatically a annuity due mode? Not necessarily. If the question states that a payment will be received periodically with the first payment today, then it will likely be an annuity due, but I cannot tell you that it will always be the case.

manavecplan how u been How is the reading going wishing u the best.

once its periodically with the first being today or immediately that should ring that annuity due bell.

With an Annuity Due – you will definitely find “telltale” key words Beginning now beginning today. and as others have suggested many times before – always make it a practice to quickly sketch a timeline, before you start to punch numbers into your calculator. Additionally, if ever your problem is an Annuity Due – and you went into the Begin mode in your calculator, make sure you get back to “Regular” mode at the end of that problem. You could end up having one more problem somewhere in the same Question paper, and believe me, they will make you kick yourselves later, because one of the answers definitely will be solved with the same Annuity Due convention (which you would now get wrongly). My \$0.02. CP

awesome…i’ll remember to write that on my flashcards. thanks guys!

cpk123 Wrote: ------------------------------------------------------- > > Additionally, if ever your problem is an Annuity > Due – and you went into the Begin mode in your > calculator, make sure you get back to “Regular” > mode at the end of that problem. You could end up > having one more problem somewhere in the same > Question paper, and believe me, they will make you > kick yourselves later, because one of the answers > definitely will be solved with the same Annuity > Due convention (which you would now get wrongly). > >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> good point. I have been caught times in exercises. > > My \$0.02. > > CP