What is an annuity in present value calculations?

In present value calculations, an annuity is a series of equal cash amounts occurring at equal time intervals. The identical cash amounts are sometimes referred to as payments, receipts, or rent.

Some examples of business transactions that form an annuity include:

  1. The equal amounts of interest paid every six months by the issuer of debt securities known as bonds.
  2. The monthly payments required by a lease agreement for equipment or a vehicle.
  3. The annual payments required by a purchase agreement.

The annuity payments are often discounted to arrive at their present value. The annuity payments can also be used to determine the effective interest rate that is embedded in an agreement.

Depending on the starting point of the first payment, an annuity will be further identified as an ordinary annuity, an annuity in advance, a deferred annuity, etc.