Ace the CMA 2025 Challenge – Unlock Your Accounting Superpowers!

Question: 1 / 430

What distinguishes an annuity due from an ordinary annuity?

Payments occur at the end of each period

Payments occur at the beginning of each period

An annuity due is characterized by payments that occur at the beginning of each period, which distinguishes it from an ordinary annuity, where payments are made at the end of each period. This timing of cash flows is critical for valuation purposes, as the earlier payments in an annuity due accumulate interest for one additional period compared to those in an ordinary annuity.

For example, if both types of annuities are for the same amount and same interest rate, the annuity due will have a higher present value than the ordinary annuity. This is because each payment in an annuity due is discounted less, given that it is received earlier. Understanding this distinction is crucial in financial planning, insurance, and various payment structures where timing significantly impacts the total financial outcome.

Get further explanation with Examzify DeepDiveBeta

No interest is earned in the first payment

Payments vary in size over time

Next Question

Report this question

Download Certified Management Accountant Practice Exam PDF Study Guide
Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy