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.

Annuities are structured to provide fixed payments for a fixed period of time.

When equal payments are made at the beginning of each period for a certain time period, they are treated as ordinary annuities.

When equal payments are made at the beginning 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.

Which of the following is an example of an annuity?

A retirement fund set up to pay a series of regular payments

A fund that invests in technology companies and distributes dividends every quarter

Eileen has a large and growing collection of animated movies. She wants to replace her old television with a new LCD model, so she has started saving for it. At the end of each year, she deposits $700 in her bank account, which pays her 7% interest annually. Eileen wants to keep saving for 4 years and then buy the newest LCD model that is available. Eileen’s savings are an example of an annuity. How much money will Eileen have to buy a new LCD TV at the end of 4 years, rounded to the nearest whole dollar?

$4,196

$3,108

$2,642

$3,326

If Eileen deposits the money at the beginning of every year and everything else remains the same, she will save by the end of 4 years?

Answer 1