In The Table Below, We Are Given Two Annuity Plans, A And B, And The Amount Invested Into Each Plan Every Month. Given This Information, Determine Which Of The Two Investments Is An Ordinary Annuity, And The Amount Invested Over A 12-month
Introduction
An annuity is a series of fixed payments made at equal intervals over a specified period of time. It is a popular investment option for individuals seeking predictable returns on their investments. In this article, we will analyze two annuity plans, A and B, and determine which one is an ordinary annuity. We will also calculate the amount invested over a 12-month period.
What is an Ordinary Annuity?
An ordinary annuity is a type of annuity where the payments are made at the end of each period. This means that the payments are made after the interest has accrued, resulting in a lower present value of the annuity. Ordinary annuities are commonly used in financial planning and are a popular choice for individuals seeking predictable returns on their investments.
Annuity Plan A
| Month | Payment |
|---|---|
| 1 | $100 |
| 2 | $100 |
| 3 | $100 |
| 4 | $100 |
| 5 | $100 |
| 6 | $100 |
| 7 | $100 |
| 8 | $100 |
| 9 | $100 |
| 10 | $100 |
| 11 | $100 |
| 12 | $100 |
Annuity Plan B
| Month | Payment |
|---|---|
| 1 | $100 |
| 2 | $100 |
| 3 | $100 |
| 4 | $100 |
| 5 | $100 |
| 6 | $100 |
| 7 | $100 |
| 8 | $100 |
| 9 | $100 |
| 10 | $100 |
| 11 | $100 |
| 12 | $100 |
Determining the Ordinary Annuity
To determine which annuity plan is an ordinary annuity, we need to examine the payment schedule. In both plans, the payments are made at the end of each month, resulting in a total of 12 payments. Since the payments are made at the end of each period, both plans qualify as ordinary annuities.
Calculating the Amount Invested
To calculate the amount invested over a 12-month period, we need to multiply the monthly payment by the number of payments. In both plans, the monthly payment is $100, and the number of payments is 12.
Amount Invested in Plan A
Amount invested = Monthly payment x Number of payments = $100 x 12 = $1,200
Amount Invested in Plan B
Amount invested = Monthly payment x Number of payments = $100 x 12 = $1,200
Conclusion
In conclusion, both annuity plans A and B are ordinary annuities, and the amount invested over a 12-month period is $1,200. The payment schedule in both plans is identical, with payments made at the end of each month. This results in a total of 12 payments, each with a value of $100.
Recommendations
Based on our analysis, we recommend that individuals considering annuity plans A and B should carefully evaluate their financial goals and risk tolerance before making a decision. Both plans offer predictable returns on investment, but individuals should consider factors such as interest rates, inflation, and market volatility when making their decision.
Frequently Asked Questions
Q: What is an ordinary annuity?
A: An ordinary annuity is a type of annuity where the payments are made at the end of each period.
Q: How do I determine which annuity plan is an ordinary annuity?
A: To determine which annuity plan is an ordinary annuity, examine the payment schedule. If the payments are made at the end of each period, the plan is an ordinary annuity.
Q: How do I calculate the amount invested over a 12-month period?
A: To calculate the amount invested over a 12-month period, multiply the monthly payment by the number of payments.
Q: What are the benefits of an ordinary annuity?
A: The benefits of an ordinary annuity include predictable returns on investment, flexibility in payment schedules, and the ability to adjust payments based on changing financial circumstances.
Q: What are the risks associated with an ordinary annuity?
Q: What is an annuity?
A: An annuity is a series of fixed payments made at equal intervals over a specified period of time. It is a popular investment option for individuals seeking predictable returns on their investments.
Q: What are the different types of annuities?
A: There are several types of annuities, including:
- Ordinary annuity: A type of annuity where the payments are made at the end of each period.
- Annuity due: A type of annuity where the payments are made at the beginning of each period.
- Variable annuity: A type of annuity where the payments are based on the performance of an underlying investment.
- Fixed annuity: A type of annuity where the payments are fixed and guaranteed.
Q: How do I choose the right annuity plan?
A: To choose the right annuity plan, consider the following factors:
- Financial goals: What are your financial goals? Are you seeking predictable returns on investment or a guaranteed income stream?
- Risk tolerance: Are you comfortable with the risk of investing in an annuity?
- Time horizon: How long do you plan to invest in the annuity?
- Interest rates: What are the current interest rates, and how will they affect your investment?
Q: What are the benefits of an annuity?
A: The benefits of an annuity include:
- Predictable returns: Annuities offer predictable returns on investment, which can help you achieve your financial goals.
- Guaranteed income: Annuities can provide a guaranteed income stream, which can help you cover living expenses in retirement.
- Flexibility: Annuities can be customized to meet your individual needs and financial goals.
- Tax benefits: Annuities can provide tax benefits, such as tax-deferred growth and tax-free withdrawals.
Q: What are the risks associated with an annuity?
A: The risks associated with an annuity include:
- Interest rate risk: If interest rates fall, the value of your annuity may decrease.
- Inflation risk: If inflation rises, the purchasing power of your annuity may decrease.
- Market volatility risk: If the market is volatile, the value of your annuity may fluctuate.
- Credit risk: If the insurance company issuing the annuity defaults, you may lose your investment.
Q: How do I calculate the amount invested in an annuity?
A: To calculate the amount invested in an annuity, multiply the monthly payment by the number of payments.
Q: What is the difference between an annuity and a CD?
A: An annuity and a CD (Certificate of Deposit) are both investment options that offer a fixed return on investment. However, an annuity typically offers a higher return on investment than a CD, and it can provide a guaranteed income stream.
Q: Can I withdraw money from an annuity?
A: Yes, you can withdraw money from an annuity, but you may face penalties or taxes on the withdrawal.
Q: How do I surrender an annuity?
A: To surrender an annuity, contact the insurance company issuing the annuity and request a surrender form. You will need to provide identification and complete the form to initiate the surrender process.
Q: What are the tax implications of an annuity?
A: The tax implications of an annuity depend on the type of annuity and the tax laws in your state. Generally, annuities are tax-deferred, meaning that you will not pay taxes on the growth of your investment until you withdraw the funds.
Q: Can I use an annuity to fund a retirement account?
A: Yes, you can use an annuity to fund a retirement account, such as an IRA (Individual Retirement Account) or a 401(k) plan.
Q: How do I choose a reputable insurance company to issue my annuity?
A: To choose a reputable insurance company to issue your annuity, research the company's financial strength, customer service, and product offerings. You can also check with the Better Business Bureau or the National Association of Insurance Commissioners (NAIC) for information on the company's reputation.