Which of the following statements about annuities are true? Check all that apply

Question

Which of the following statements about annuities are true? Check all that apply When equal payments are made at the beginning of each period for a certain time period, they are treated as an annuity due when equal payments are made at the beginning of each period for a certain time period, they are treated as ordinary annuities Annuities are structured to provide fixed payments for a fixed period of time An ordinary annuity of equal time earns less interest than an annuity due Which of the following is an example of an annuity? O A retirement fund set up to pay a series of regular payments O A fund that invests in technology companies and distributes dividends every quarter Luana loves shopping for clothes, but considering the state of the economy, she has decided to start saving. At the end of each year, she will deposit $1,130 in her local bank, which pays her 4% annual interest. Luana decides that she will continue to do this for the next seven years. How much will she save by the end of seven years? $6,782.32 O $8,925.07 O $7,586.31 $9,282.08 If Luana deposits the money at the beginning of every year and everything else remains the same, how much will she save by the end of seven years?

Explanation / Answer

As per rules I am answering the first 4 sub parts of the question

1. Options 1, 3 are true

Ordinary annuity payments made at the end of each period and annuity due is the payment made at the beginning of each period. So option one is correct and option 2 is wrong. Option three is correct because annuities are equal payments made for a fixed period of time. Option 4 is incorrect because annuity due will earn more interest than ordinary annuity because it is kept for a longer time.

2. The retirement fund is an example of annuity because it pays a series of equal amounts for a fixed period of time. The fund which distributes dividend is not an example of annuity because the payments are neither equal nor regular.

3:

We use FV of annuity formula for this. Amount at the end of the period = P*((1+r)^n-1) / r

= 1130*(1.04^7-1)/0.04

=8925.07

4:

We use FV of annuity due formula for this. Amount at the end of the period = (1+r)*(P*((1+r)^n-1) / r)

= (1.04)*1130*(1.04^7-1)/0.04

=9282.08

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