What is ordinary annuity?

An ordinary annuity is a series of equal cash payments made or received at the end of each period over a specified time, typically on a yearly basis. It is an investment or loan that typically involves an agreement between an individual or entity making payments and a financial institution or entity receiving payments. The cash payments, which are typically based on a set interest rate and principal amount, continue until the end of the specified period or until the principal amount is fully repaid.

One common example of an ordinary annuity is a mortgage payment, where the borrower makes equal monthly payments to the lender for the duration of the loan term. Another example is a retirement fund, where a person can make periodic contributions and receive regular payments once they reach retirement age.

In terms of calculations, the present value of an ordinary annuity can be determined using a formula that combines the amount of each payment, the interest rate, and the number of payments. This calculation is commonly used in financial analysis as a way to evaluate investment opportunities or debt obligations.

Overall, an ordinary annuity is a financial instrument that provides a consistent stream of payments over a specified period, helping individuals and institutions to manage cash flow and meet financial objectives.