Certified Management Accountant Practice Exam

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How is an ordinary annuity defined?

A series of equal periodic payments made at the beginning of each period
A series of equal periodic payments made at the end of each period
A variable series of payments based on performance
A single payment made after multiple periods

The correct answer is: A series of equal periodic payments made at the end of each period

An ordinary annuity is defined as a series of equal periodic payments made at the end of each period. This type of annuity is commonly seen in financial contracts where the payments remain consistent for the duration of the agreement, thus simplifying financial calculations and projections. The distinction of timing is crucial; in an ordinary annuity, since the payments are made at the end of each period, it allows for the accumulation of interest for the full duration of the payment period. This results in different present value and future value calculations compared to annuities that involve payments made at the beginning of each period, such as an annuity due. Understanding this definition is essential for managing cash flows in finance and investments, determining loan schedules, retirement plans, and other financial instruments that involve regular payments over time.