Corporate Finance Practice Test 2026 - Free Finance Practice Questions and Study Guide

An annuity due is defined as a series of equal payments made at the beginning of each period. This structure contrasts with an ordinary annuity, where payments occur at the end of each period. The key aspect of an annuity due is that it effectively provides an extra time period for interest to accrue on each payment compared to an ordinary annuity.

For example, if both types of annuities involve a payment of $1,000 per year for five years with an interest rate of 5%, the present value of the annuity due would be higher than that of the ordinary annuity due to the timing of the cash flows. Because the payments of the annuity due are made earlier, they each have a longer duration to accumulate interest, resulting in a higher overall value.

This understanding of payment timing is crucial in corporate finance, as it affects cash flow analysis, investment valuations, and financial planning, emphasizing the importance of recognizing when cash is received or paid.