QuestionWhich option describes an annuity? A. lump sum B. in a one-year C. savings D. regular deposits
Studdy Solution
STEP 1
Assumptions1. An annuity is a series of equal payments made at regular intervals.
. A lump sum is a single payment of money, as opposed to a series of payments made over time.
3. A CD (Certificate of Deposit) is a type of financial product commonly sold by banks, thrift institutions, and credit unions.
4. A savings account is a deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.
5. A sinking fund is a fund established by an economic entity by setting aside revenue over a period of time to fund a future capital expense, or repayment of a long-term debt.
STEP 2
Now, let's examine each option and see which one fits the definition of an annuity.
A. Investing a \$1,000 lump sum into an investment account. This is a one-time payment, not a series of equal payments made at regular intervals.
B. Depositing \$5,000 into a one-year CD. This is also a one-time payment, not a series of equal payments made at regular intervals.
C. Using \$500 to open a savings account. This is also a one-time payment, not a series of equal payments made at regular intervals.
. Making regular deposits of \$100 into a sinking fund. This involves making a series of equal payments (\$100) at regular intervals, which fits the definition of an annuity.
The correct answer is D. Making regular deposits of \$100 into a sinking fund involves an annuity.
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