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. 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 An annuity due is an annuity that makes a payment at the end of each period for a certain time period. Ordinary annuities make fixed payments at the end of each period for a certain time period. Which of the following is an example of an annuity? O 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 $920 in her bank account, which pays her 8% interest annually. Ashley wants to keep saving for six 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 six years? $6,749.05 O $7,288.98 O $5,736.69 O $4,253.0s If Ashley deposits the money at the beginning of every year and everything else remains the same, she will save by the end of six years

Explanation / Answer

Q2.

Q1. Option 1, 2 and 4 are true Explanation: lets say we have annual rate as 8%, period of 10yrs and 200 is the annuity. We want to calculate future value using both the methods, ordinary annuity and annuity due beginning of the period deposit indicates annuity due You can use the FV function in excel FV(Rate, NPER, PMT, PV, Type) Type has to be 1 indicating deposits are at the beginning FV(8%,10,200,,1) 3,129.10 ordinary annuity (end of the period) FV(8%,10,200) 2,897.31 Option 2, perpetuity is indeed equal cash flow or an annuity over an infinte period of time Option 4 end of the period means ordinary annuity

Q2.

Option 1, A retirement fund set up to pay a series of regular payments, these regular equal value payments are annuities Q3. End of each year mentioned in the question means ordinary annuity You can use the FV function in excel FV(Rate, NPER, PMT, PV, Type) rate 8%, nper 6(yrs), PMT (annuity) 920 FV(8%,6,920) 6749.05 Option 1 Q3 part b) beginning of the period deposit indicates annuity due You can use the FV function in excel FV(Rate, NPER, PMT, PV, Type) rate 8%, nper 6(yrs), PMT (annuity) 920 Type has to be 1 indicating deposits are at the beginning FV(8%,6,920,,1) 7,288.98

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