question archive Which of the following is true regarding annuities? 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 annuity due is an equal stream of cash flows is paid or received at the beginning of each period, d) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period
Which of the following is true regarding annuities? 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 annuity due is an equal stream of cash flows is paid or received at the beginning of each period, d) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period
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Which of the following is true regarding annuities?
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 annuity due is an equal stream of cash flows is paid or received at the beginning of each period,
d) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.
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- The correct answer is c) An annuity due is an equal stream of cash flows paid or received at the beginning of each period.
An annuity due refers to a regular stream of cash flows paid or received at the beginning of each period. The most common example of an annuity due is rent, which is collected before an individual enjoys the benefits of an apartment. In contrast, an ordinary annuity refers to a series of regular payments that are paid at the end of a fixed period. An example is dividends on stock or interest on bonds. The value of payments from an annuity due are higher compared to those of an ordinary annuity as they are received earlier. This difference is explained by the time value of money, which argues that any amount of money held now is worth more than the same amount in the future due to its ability to gain interest.
