Jenny just won a scholarship that will pay her $500 a month, starting the end of this month, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

1) Perpetuity due

2) Ordinary perpetuity

3) Ordinary annuity

4) Annuity due

5) Consol

The answer is Ordinary annuity.

Explanation:

An annuity is a series of regular payments for a fixed period of time. In this light, we identify two types of annuities;

- the annuity due which is a fixed payment to be made at the beginning of each period,

- the ordinary annuity which is a fixed payment to be made at the end of each period.

In this case, Jenny receives a cash flow per period or annuity of $500 for a fixed period of 48 months, to be paid at the end of each month, hence it is an ordinary annuity.