Question

Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?

Answer 1

Growing Annuity: It is also referred to as graduated annuity. A growing annuity is one in which the series of payments keeps increasing at a constant rate for a defined period. The main characteristic of a growing annuity is that the first payment made is always lesser than the subsequent payments and each payment increases at a constant rate.It is different from a perpetuity in the sense that in perpetuity the series of payment keeps increasing at a constant rate for an infinite period.

An example of a growing annuity would be an investment in which the payments by an investor is expected to grow at a constant rate, say 4%, every year for a period of 10 years before the investor gets the benefits from the same.