Difficulty: Easy

Average Score: 100%

Which description illustrates an annuity?

Rationale

Monthly payments by customers to a cell phone provider for services on a 2-year contract illustrate an annuity.

An annuity is a series of equal payments made at regular intervals over a specified period. In this case, the monthly payments made by customers for cell phone services represent consistent, predictable cash flows over the duration of the contract.

A (Payment by credit card customer on their purchases from last month) YOUR ANSWER

This option refers to a one-time payment for purchases made in a previous billing cycle. Unlike an annuity, which involves a series of equal payments over time, this choice does not represent a recurring payment structure.

B (Monthly payments by customers to a cell phone provider for services on a 2-year contract) CORRECT

This is the correct choice, as it describes a regular series of payments made by customers over a defined time period (monthly for two years). Each payment is the same amount, fitting the definition of an annuity.

C (Purchase of inventory by a manufacturing firm for use over multiple periods) YOUR ANSWER

This option describes a one-time purchase of goods intended for use in production over time. It does not involve a series of payments; thus, it does not align with the concept of an annuity, which requires regular payments.

D (One-time purchase of a cell phone at the beginning of a 2-year service agreement) YOUR ANSWER

This choice represents a single transaction made at the start of a contract. While it may be related to a service agreement, it does not involve a series of regular payments, which is essential for an annuity.

Conclusion

An annuity is defined by regular, equal payments made over a specified period. The monthly payments made by customers to a cell phone provider exemplify this characteristic, as they are consistent and occur over the length of the contract. Other options either refer to one-time payments or do not involve the structured payment series that defines an annuity.

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