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. Ordinary annuities make fixed payments at the end of each period for a certain time period. An annuity due is an annuity that makes a payment at the end of each period for a certain time period. An annuity due earns more interest than an ordinary annuity of equal time. A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.

Question

Brenton

Business

11 September, 09:10

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. Ordinary annuities make fixed payments at the end of each period for a certain time period. An annuity due is an annuity that makes a payment at the end of each period for a certain time period. An annuity due earns more interest than an ordinary annuity of equal time. A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.

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Answers (1)

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Kian Gates · Answer 1

All statement are correct except the the second one.

Explanation:

Ordinary annuities make fixed payments at the end of each period for a certain time period.

True. the differentiating feature between ordinary annuities and annuity dues is the timing of the cash-flows - If payments are made at the end of each period, the payment stream is an ordinary annuity but if payments are made at the beginning of each period, then the stream is an annuity due.

An annuity due is an annuity that makes a payment at the end of each period for a certain time period.

False. with an annuity due, payments are made at the beginning of each period.

An annuity due earns more interest than an ordinary annuity of equal time.

True. Payments are made sooner in an annuity due, with the 1st payment made at the beginning of the first period and the last payment being made at the beginning of the last period. Thus each payment earns interest and as a result, both the present value and the future value are higher than that of an ordinary annuity.

A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.

True. A perpetuity is a stream of cash-flows starting at a certain date with equal payments at equal intervals but with no terminal date. Therefore the stream of cash-flows is expected to continue forever - which makes it an infinite annuity.