Annuity in arrears definition
/What is Annuity in Arrears?
An annuity in arrears is a series of payments that are due at the end of each successive time period. For example, the periodic payments on a mortgage are usually paid in arrears. Many payments on installment loans can be classified as an annuity in arrears. This type of payment schedule reduces the present value of the payments, since the payments are made later in time. Because of this present value issue, the value of an annuity in arrears will increase when interest rates decline, and fall when interest rate increase.
Terms Similar to Annuity in Arrears
An annuity in arrears is also called an ordinary annuity.
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Annuity in Arrears FAQs
Is an annuity in arrears favorable to the payer or receiver?
An annuity in arrears is generally more favorable to the payer because payments are made at the end of each period, allowing the payer to retain and potentially invest the money longer. For the receiver, this delay means they receive funds later, reducing the present value of the cash flows. Therefore, the payer benefits from the time value of money in this arrangement.
How does an annuity in arrears differ from an annuity in advance?
An annuity in arrears makes each payment at the end of a period, such as a month-end loan payment. An annuity in advance makes each payment at the beginning of a period, such as rent paid at the start of the month. Timing affects present value and future value calculations.
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