Which of the following statements is correct?

Question

BlackTom AI · Accepted Answer

Consider the topic of annuities and when payments are made in each type.
Option 1: 'The cash flows for an annuity due must all occur at the beginning of each period.' This is accurate, since an annuity due features payments that are made at the start of each period, not at the end. The timing is a defining characteristic.
Option 2: 'The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.' This describes a stream with regular timing, but the phrase 'may vary from period to period' contradicts the classic definition of an annuity, which assumes fixed payments in traditional series. A varying amount cash flow with regular intervals aligns more with a general variable payment stream rather than a standard annuity.
Option 3: 'If an uneven cash flow stream has regular intervals, such as once a year, then it is an annuity.' The key flaw here is that irregular (uneven) payments disqualify it as a standard annuity, even if the intervals are regular. Annuities require fixed payments per period.
Option 4: 'The cash flows for an ordinary annuity all occur at the beginning of each period.' This describes an annuity due, not an ordinary annuity. In an ordinary annuity, payments occur at the end of each period, so this statement mislabels the timing.
In summary, each option highlights common misconceptions about timing and variability of cash flows in annuities, contrasting them with the defining features of the various annuity types.

Which of the following statements is correct?

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