Question

There are three categories of cash flows: single cash flows, also referred to as "lump sums," a stream of unequal cash flows, and annuities. Based on your understanding of annuities, answer the following questions. Which of the following statements about annuities are true? Check all that apply. An ordinary annuity of equal time earns less interest than an annuity due. When equal payments are made at the end of each period for a certain time period, they are treated as ordinary annuities. A perpetuity is a series of equal payments made at fixed intervals that continue infinitely and can be thought of as an infinite annuity. When equal payments are made at the end of each period for a certain time period, they are treated as an annuity due.

Answer 1

Answer:

• An ordinary annuity of equal time earns less interest than an annuity due.
• When equal payments are made at the end of each period for a certain time period, they are treated as ordinary annuities.
• A perpetuity is a series of equal payments made at fixed intervals that continue infinitely and can be thought of as an infinite annuity.

Explanation:

With an Annuity due, the payments are made at the beginning of the period as opposed to an ordinary annuity which is paid at the end. This difference gives the Annuity due more time to accrue interest which leads it to earning more interest than an ordinary annuity of the same time.

As earlier mentioned, Ordinary annuities involve payments made at the end of each period. Annuities are always equal payments so the second statement holds true.

A Perpetuity is indeed an annuity because of the fixed payments characteristic that it has. It is therefore called a Perpetual/ Infinite Annuity.