Exactly What Are Annuities? - dummies

By Maire Loughran

Annuities are a series of payments paid or received over a period of time. A typical example is rent payments made to a property owner. Annuities also include bond payments — companies issue bonds when they want to raise money. Bonds are debt, which means that the company eventually has to pay back the bond investor.

To be classified as an annuity, a constant amount of money has to be paid or received over a fixed period of time. The first annuity many kids receive is a weekly allowance from their parents. Adult annuities can get a bit more complex than that, but the principal is basically the same. Two basic types of annuities exist: ordinary annuities and annuities due.

  • Ordinary annuity: This annuity requires payments at the end of each previously determined financial period. For example, a bond may require payments to the investor at the end of every six months (for example, June 30), until maturity date.

  • Annuity due: Got you on the flip-flop! Payments are due at the beginning of each period (for example, January 1). A good example of this is rent you for an apartment. The landlord normally expects payment in hand on the first of each month.