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Multiple Choice
In the context of time value of money, what is the accumulation period for an immediate annuity?
A
It lasts for the entire term of the annuity.
B
It is the period between the purchase and the first payment.
C
It is equal to the payout period.
D
There is no accumulation period; payments begin immediately.
Verified step by step guidance
1
Understand the concept of an immediate annuity: An immediate annuity is a financial product where payments to the annuitant begin immediately after the purchase, typically within one payment period.
Clarify the term 'accumulation period': In financial accounting, the accumulation period refers to the time during which funds are being accumulated or invested before payouts begin. For an immediate annuity, this period does not exist because payments start right away.
Compare the options provided: Analyze each option to determine its relevance to the definition of an immediate annuity. For example, the accumulation period cannot last for the entire term of the annuity because payments begin immediately.
Evaluate the correct answer: Since payments begin immediately after the purchase, there is no accumulation period for an immediate annuity. This aligns with the definition of the product.
Conclude with the reasoning: The correct answer is 'There is no accumulation period; payments begin immediately,' because the defining characteristic of an immediate annuity is the absence of a delay between purchase and payout.