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: Conceptual Understanding:
This question assesses knowledge of financial instrument definitions and annuity-related concepts. An annuity is a sequence of equal payments made at regular intervals.
Step 2: Detailed Definitions:
Definitions of provided terms:
- Sinking Fund: A fund established by a company to accumulate funds over time for debt or bond retirement. It involves fixed periodic payments over a set term to reach a target future amount and has a defined termination date.
- Perpetuity: An annuity characterized by cash flows that continue indefinitely ("forever"). It lacks an end date, aligning with the question's description.
- Coupon Payment: The regular interest payment from a bond issuer to a bondholder. It is a component of a bond, not the annuity itself, and typically ceases upon bond maturity.
- Bond: A debt instrument representing a loan from an investor to an entity (corporate or governmental) for a specified period, bearing a fixed or variable interest rate. It has a fixed maturity date.
Step 3: Conclusion:
An annuity with perpetual payments is termed a perpetuity.