Which of the following statements is CORRECT? Answer a. The cash flows for an or

Question

Which of the following statements is CORRECT?
Answer

a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

b. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

c. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

d. The cash flows for an annuity due must all occur at the ends of the periods.

e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

Explanation / Answer

A)     Option ‘a’ is wrong because when cash flows occur at the end of each period the annuity is called a regular annuity or a deferred annuity.

B)      An annuity is series of equal payments occur once a year or regular intervals is correct.

Annuity means serious of equal payments lasting for some specific duration. So it is correct

C)      Annuity is not a series of unequal payments it is serious of equal payments. So it is also wrong

D)     The cash flows of annuity due occur at beginning of each period not the ending of each period. So it is wrong

E)      No , if some cash flows occur at beginning of period and some occur at end of the period also the text book gives same annuity but here we have some formulas by calculating these we can arrive those are

For compounding annuity at beginning of year the formula is under

                   Vn = (R)(ACFi,n)(1+i)

But in case of compounding annuity at end of year the formula is under

                    Vn=(R)(ACFi,n)

So there no variable annuity tables.

Final answer is: ‘ b’ option

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