Question

An annuity in which the periodic payment begin on a fixed date and continue forever is called

• A. Sinking Fund
• B. Perpetuity
• C. Coupon payment
• D. Bond

Hint:

The word "perpetuity" comes from "perpetual," which means everlasting or never-ending. This linguistic link can help you remember its definition in finance.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question requires knowledge of the definitions of different financial instruments and concepts related to annuities. An annuity is a series of equal payments made at regular intervals.
Step 2: Detailed Explanation:
Let's define the given terms:
- Sinking Fund: A fund created by a company to set aside money over time to retire its debts or bonds. It involves making periodic payments for a fixed term to accumulate a specific future sum. It has a definite end date.
- Perpetuity: A type of annuity where the stream of cash flows continues indefinitely, or "forever". It does not have an end date. This perfectly matches the description in the question.
- Coupon payment: This is the periodic interest payment made by the issuer of a bond to the bondholder. While it's a periodic payment, it is a component of a bond, not the name of the annuity itself, and it typically ends when the bond matures.
- Bond: A debt instrument where an investor loans money to an entity (corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. It has a fixed maturity date.
Step 3: Final Answer:
An annuity with payments that continue forever is called a perpetuity.