Question

Which of the following statements about annuities are t rue ? Check all that apply

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

Which of the following is an example of an annuity?

A   A lump-sum payment made to a life insurance company that promises to make a series of equal payments later for some period of time
B An investment in a certificate of deposit (CD)

Luana loves shopping for clothes, but considering the state of the economy, she has decided to start saving. At the end of each year, she will deposit $710 in her local bank, which pays her 13% annual interest. Luana decides that she will continue to do this for the next five years. Luana's savings are an example of an annuity. How much will she save by the end of five years?

0	$4,600.99
0	$3,910.84
0	$5,199. 12
0	$2,497.23

If Luana deposits the money at the beginning of every year and everything else remains the same, she will save____________ by the end of five years.

Answer 1

1. Following statements are true about Annuity concept:

A part, B part and D part

Whereas C part is not true

Explanation:

1. Annuity refers to the concept of paying a certain fixed amount either at the end or beginning of a certain period continuously at regular intervals.
2. Whereas if the fixed installment is paid at the beginning of the period then it is known as Annuity Due (B Part) and if the fixed installment is paid at the end of the period it is known as Ordinary Annuity. (A Part)
3. Another Concept is perpetuity whose period is infinite i.e. number of fixed installments paid at a certain fixed period at regular intervals for infinite period. (D Part)
4. Annuity due gets more interest than Ordinary Annuity as in Annuity due it is paid at the beginning of the period, so it gets interest for one more period than ordinary annuity. (C Part)

2. A part Explanation: This is an example of annuity as a lump sum payment has been made to the life insurance company which is giving us back payments at regular intervals. Applying the above definition this is a perfect example of annuity concept.

B part Explanation: Certificate of deposit is a fixed investment in which there is no flow of payments or deposits at regular intervals. So it is not an example of annuity.

3. If Luana deposits at the end of each year $ 710. She would accumulate

Formula for future value of annuity = P * ((1+r)^n – 1 ) / R)

= 710 *((((1+.13)^5 )-1)/.13)

= $ 4,600.99

If she deposits at the beginning of each year. She would accumulate

Formula for future value of annuity due = (1+ r)* (P * ((1+r)^n – 1 ) / R)

= (1+.13) * (710 *((((1+.13)^5 )-1)/.13))

= $ 5,199.12