The Ins and Outs of an Ordinary Annuity

An ordinary annuity is a type of annuity that pays a regular series of payments. This annuity offers you payments at the end of each period. There are two different types of annuities that you could invest in. One is referred to as an ordinary annuity and another is called an annuity due. The annuity due pays you at the beginning of a particular period while the ordinary annuity pays you at the end of the annuity period. An ordinary annuity could be paid at the end of any time period. For example, you could be paid at the end of every year, every six months, every quarter or even every month. 

Bonds

The most common type of ordinary annuity is a bond. With a traditional bond, a coupon payment will be paid periodically. The coupon rate is essentially the interest rate that is going to be paid by the bond issuer to the investor. Many bonds pay every quarter, while others pay every six months for the life of the bond. For example, if you invest in a 30 year bond, you could receive payments every six months for the next 30 years.

Steady Income

One of the reasons that investors get involved with ordinary annuities is so that they can receive a steady income. Investing in bonds can create a regular income stream for yourself that would replace your traditional income. Many investors will create a bond ladder that spreads out the payments that they receive from their bonds. By doing this, you could potentially receive coupon payments every month for the rest of your life. 

Secondary Market

Once you invest in this type of bond, you could potentially choose to sell it in the secondary market. There are other investors that will be willing to buy the bond from you. In order to price the bond, you will need to establish the future value of the annuity. In order to do this, you can utilize an annuity calculator or use a financial formula to come up with the value of the bond for you.

Interest Rates

The value of your bond is going to be affected by changes in market interest rates. Bond values have an inverse relationship to market interest rates. When market interest rates increase, the value of your bond is going to decline. When market interest rates decrease, the value of your bond is going to increase. This means that if you are planning on selling your bond on the secondary market, you will want to do so when market interest rates are below the coupon rate that you receive from your bond. If you plan on holding your bond until maturity, the interest rates in the market do not matter.

Ordinary annuities are becoming more and more popular with investors because of their ease of use. Consult with your financial adviser before making any investments so that you do not place your money at risk.

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