Question

Which of the following is true of annuities?

Select one: a. An ordinary annuity is an equal payment paid or received at the beginning of each period.

b. An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period.

c. An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.

d. An annuity due is an equal stream of cash flows that is paid or received at the beginning of each period.

Answer 1

An annuity due is defined as an equal stream of cash flows that is paid or received at the beginning of each period.

An ordinary annuity is defined as an equal stream of cash flows that is paid or received at the end of each period.

Option a is incorrect because ordinary annuity is defined as an equal stream of cash flows that is paid or received at the end of each period and not at the beginning of each period.

Option b is incorrect because annuity due is defined as an equal stream of cash flows that is paid or received at the beginning of each period and the amount does not increases by an equal amount each period.

Option c is incorrect because ordinary annuity is defined as an equal stream of cash flows that is paid or received at the end of each period and the amount does not increases by an equal amount each period.

option d is correct since an annuity due is defined as an equal stream of cash flows that is paid or received at the beginning of each period.

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