There are two categories of cash flows: single cash flows, referred to as \"lump
ID: 2813924 • Letter: T
Question
There are two categories of cash flows: single cash flows, referred to as "lump sums," 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. A perpetuity is a series of equal payments made at fixed intervals that continue infinitely and can be thought of as an infinite annuity. When equal payments are made at the end of each period for a certain time period, they are treated as ordinary annuities. An ordinary annuity of equal time earns less interest than an annuity due When equal payments are made at the end of each period for a certain time period, they are treated as 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 quarterly dividends for two out of four quarters per year but not always the same quarters Ashley 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 $1,060 in her bank account, which pays her 11% interest annually. Ashley wants to keep saving for four years and then buy the newest LCD model that is available. Ashley's savings are an example of an annuity. How much money will Ashley have to buy a new LCD TV at the end of four years? $%4,992.31 O $3,288.59 O $5,541.47 O $4,243.46 If Ashley deposits the money at the beginning of every year and everything else remains the same, she will save by the end of four years.Explanation / Answer
1) Which are true statements
Only statement 4 is false.All others are true. statement 4 is false because in annuity due we are making payments at the begining of each period. Since annuity due makes payment sooner it has higher present value than an ordinary annuity,hence higher interest rate han an ordinary annuity. In an ordinary annuity equal payments are made at the end of each period for certain period. If it is for infinite time it forms a perpetuity.
2) Example for annuity
You have correctly selected the option.A retirement fund set up to pay a series of regular payments.
3) Future Value of Annuity
Future value of Annuity = A [((1+r)n-1) / r]
Where
A - Annuity payment = 1060
r - rate per period = 11%
n - no. of periods = 4
Future value of Annuity =1060* [((1+.11)4-1) / .11]
= 1060*4.70973
= 4992.31
If deposited money at the begining of the period-
Future value of Annuity Due = A [((1+r)n-1) / r] * (1+r)
= 1060* [((1+.11)4-1) / .11] *1.11
= 1060*5.2278
= 5541.47