Accountant Interview Question:

Explain ordinary annuity?

Submitted by: Muhammad

In accounting, an ordinary annuity refers to a series of identical cash amounts with each amount occurring at the end of equal time intervals.
An example of an ordinary annuity is the series of semiannual interest payments that are part of a bond payable. For instance, a 10-year bond with a maturity amount of $10 million and a stated interest rate of 6% will require interest payments of $300,000 at the end of each of the 20 six-month time intervals.
Another example of an ordinary annuity is a mortgage loan having a fixed interest rate and a series of equal monthly payments that will begin 30 days after the loan is granted. Thus a 15-year mortgage loan will result in an ordinary annuity of 180 equal monthly payments with the first payment due approximately 30 days after the loan is made.
An ordinary annuity is also known as an annuity in arrears.
Submitted by: Muhammad