Annuity in arrears

What is a delinquent annuity?

A delinquent annuity refers to the payment of an equal amount of money that is made at the end of a regular term. It does not refer to an annuity product per se, but rather refers to a payment structure that an annuity could employ. A common example of an annuity in arrears is a mortgage payment.

A delinquent annuity, a legal, accounting, and actuarial term, is also known as an “ordinary annuity.” The opposite of an overdue annuity is known as an “advance annuity” or “due annuity.”

Key takeaways

  • A delinquent annuity is the payment of money made at the end of a regular term.
  • This payment can be an interest or mortgage, or another recurring payment.
  • The present value of annuity payments in arrears is less than annuity payments in advance or annuities owed.

How the delinquent annuity works

Another way to describe an overdue annuity is a series of recurring, periodic payments that are due at the end of a predetermined period. That payment could be an interest, a mortgage payment consisting of principal and interest, or any other recurring payment, most often an installment loan payment, that allows interest to accrue.

Other examples of this concept are semiannual interest payments made on a bond or quarterly or annual dividend payments. While the term “past due” is part of “past due annuity,” their meanings are very different. “Overdue” is simply used to indicate that a payment is late.

Annuity in arrears and present value

Since payments for an overdue annuity (or ordinary annuity) are made at the end of a specified period, the present value of such payments is less than in an advance annuity or past due annuity, which includes a payment at the beginning of a period. . The value of a delinquent annuity will decrease when interest rates rise and will increase when interest rates fall.

The reason for this is that the present value of future cash payments depends on the interest rate used to calculate the present value. When the time value of money (TVM) changes, so does the valuation of the annuity.

As such, if you are the one making the payment, an annuity overdue due to inflation and the opportunity to earn interest on investments or interest-bearing accounts is preferable, since a sum of money today is worth more than the same sum in the future. . By reflex, if you are the party receiving a payment, an annuity owed (or an annuity in advance) is preferable for the same reason.

Characteristics of the delinquent annuity

There are three elements of a delinquent annuity (or ordinary annuity):

  1. Each payment is the same amount (for example, a series of payments of $ 100).
  2. Each and every payment is made in the same time interval (for example, monthly or quarterly over a period of one year or more).
  3. Each and every payment is made at the end of the specified time period (for example, a payment made on the last day of each month).

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Mark Holland

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