Which statement best describes an annuity?

Which statement best describes an annuity?

• A. It involves a finite number of equal payments
• B. It is always a perpetual payment stream
• C. It consists of a single payment
• D. It pays interest only with no principal repayment

Answer: (A)

An annuity is a finite series of equal payments made at regular intervals. That puts the focus on a set number of payments that are all the same amount. If payments went on forever, it would be a perpetuity, not an annuity. If there were just a single payment, there’s no ongoing payment stream. If only interest is paid with no return of principal, that’s an interest-only arrangement, not an annuity. So the defining idea is a predetermined, finite sequence of equal payments.

An annuity is a finite series of equal payments made at regular intervals. That puts the focus on a set number of payments that are all the same amount. If payments went on forever, it would be a perpetuity, not an annuity. If there were just a single payment, there’s no ongoing payment stream. If only interest is paid with no return of principal, that’s an interest-only arrangement, not an annuity. So the defining idea is a predetermined, finite sequence of equal payments.