Question

3. What is an annuity? Give some examples of annuities. Distinguish between an annuity and perpetuity.

Answer 1

Definition of Annuity.

It is referred to as series of equal amount of cashflows for a certain given years. In simple terms it can be a contract between a person and insurance company in which the person makes either a lumpsum payment or series of payment in return to which the insurance company will pay at regular intervals either immediately or at a later period. In cas of banks when home loans are discharged by way of making regular and equal amount of payments to the bank for giving loan to that person

Examples of Annuity

1. Monthly insurance premium payments

2. Deposits to savings bank account

3. Pension payments

4. Rent

5. Payment of home loans

Difference between annuity and perpetuity

1. An annuity is an investment where payments are made at regular intervals for a definite period of time while perpetuity is also a kind of annuity where payments are made for indefinite period.

2. Annuities are common while pertuity is rare and are generally made by insurance companies to customers.

3. In annuity there is an element of compound interest since it is for a definite payment while perpetuity has usage of simple interest or specified interest only because it is for a indefinite period of time.