Multiple Choice
If John makes an extra payment of \(15 each month on a loan with a 6% annual interest rate compounded monthly, how much total interest will he save over the life of a 5-year \)5,000 loan compared to making only the minimum payments?
10. Time Value of Money
Time Value of Money Equations
Multiple Choice
Which of the following best describes an ordinary annuity in the context of time value of money equations?
A
A single lump-sum payment made at the beginning of the investment period.
B
A series of equal payments made at the end of each period for a specified number of periods.
C
A series of equal payments made at the beginning of each period for a specified number of periods.
D
A series of unequal payments made at irregular intervals.
Verified step by step guidance1
Step 1: Understand the concept of an ordinary annuity. An ordinary annuity refers to a series of equal payments made at the end of each period for a specified number of periods. This is a key distinction from other types of annuities, such as an annuity due, where payments are made at the beginning of each period.
Step 2: Analyze the options provided in the problem. The options describe different types of payment structures, and you need to identify which one aligns with the definition of an ordinary annuity.
Step 3: Eliminate incorrect options. For example, a single lump-sum payment made at the beginning of the investment period does not describe an ordinary annuity, as it involves only one payment rather than a series of payments.
Step 4: Compare the remaining options. A series of equal payments made at the beginning of each period describes an annuity due, not an ordinary annuity. Similarly, a series of unequal payments made at irregular intervals does not fit the definition of an ordinary annuity.
Step 5: Confirm the correct answer. Based on the definition, the correct description of an ordinary annuity is 'A series of equal payments made at the end of each period for a specified number of periods.'
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