An annuity is best described as what?

An annuity is best described as what?

• A. A series of equal annual payments
• B. A single lump-sum payment
• C. A fluctuating sequence of payments
• D. A zero-coupon investment

Answer: (A)

An annuity is a stream of payments made at regular intervals. In most cases those payments are the same amount each period, which is why describing it as a series of equal annual payments fits best. This differs from a lump-sum payment, which is just one payment made at once; from a fluctuating sequence, where the amounts vary; and from a zero-coupon investment, which involves no payments until a single payout at the end. Note that some annuities are fixed while others can be variable, and timing can be at the end or the beginning of each period, but the idea of regular, equal payments is the defining feature.

An annuity is a stream of payments made at regular intervals. In most cases those payments are the same amount each period, which is why describing it as a series of equal annual payments fits best. This differs from a lump-sum payment, which is just one payment made at once; from a fluctuating sequence, where the amounts vary; and from a zero-coupon investment, which involves no payments until a single payout at the end. Note that some annuities are fixed while others can be variable, and timing can be at the end or the beginning of each period, but the idea of regular, equal payments is the defining feature.