In simple terms, an annuity is an income or outlay of money that occurs every certain interval of time, which is not always a year.
However, the important thing is that the time period that separates one income from the other is always the same.
For example, we can refer to the annuity that is paid for a mortgage loan. In this case, it may be a constant monthly installment ( linear accounting amortization ) that must be paid for a twenty-year debt period.
However, it should be clarified that there is a type of annuity called improper or variable where the amount of income is not always the same.
Elements of annuities
The elements of annuities are:
Rent: Amount withdrawn, deposited or paid periodically.
Rent payment period: Time interval that has been established between one rent and another.
Term of the annuity: Period that elapses between the first and the last income.
Annuity rate: Interest rate fixed for the operation, for example, as in the case of a loan, where each installment will normally incorporate the accumulated interest.
Types of annuities
Annuities can be classified differently. For example, by the time they must be paid, they can be cataloged such that:
Overdue : Payment is made at the end of the agreed period. For example, at the end of each month.
Deferred: Payment is made in a later period, prior agreement between the parties involved. For example, when the expenses made with the credit card in the month of June can be paid until the fifteenth of July.
Anticipated annuity: The payment is scheduled at the beginning of the period, for example, at the beginning of the month.
On the other hand, according to the certainty of payment, annuities can be classified as:
True: The exact days of payments are established in a contract, and for a predetermined period.
Eventual or contingent: The initial or final payment is made as long as a previously agreed event occurs between the parties involved. For example, a life insurance that is activated when the contractor dies.
We also have other types of annuity. Depending on its duration, it can be for life (as long as the rentier lives) or temporary (for a specified period of time).
Likewise, there are simple annuities, when the payment period coincides with the capitalization period. For example, a rent that is paid every fortnight of the month.
However, in the case of a general annuity, the income period does not coincide with the compounding period. There may be an income for several compounding periods or several compounding periods that generate income. Let us suppose the case of a loan with quarterly capitalization, but that generates monthly payments.
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