There are two categories of cash flows: single cash flows, referred to as “lump sums,” 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.
When equal payments are made at the end of each period for a certain time period, they are treated as ordinary annuities.
When equal payments are made at the end of each period for a certain time period, they are treated as an annuity due.
An ordinary annuity of equal time earns less interest than an annuity due.
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 lump-sum payment made to a life insurance company that promises to make a series of equal payments later for some period of time
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 4% annual interest. Luana decides that she will continue to do this for the next seven years. Luana’s savings are an example of an annuity. How much will she save by the end of seven years?
$4,261.46
$5,607.79
$4,766.62
$5,832.10
If Luana deposits the money at the beginning of every year and everything else remains the same, she will save by the end of seven years.
