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Which of the following best describes an annuity?
Deposits are made at random (whenever you have extra money) into an account
earning interest.
A lump sum is deposited into an account earning compound interest.
A lump sum is deposited into an account earning simple interest.
Equal, regular deposits are made into an account earning interest.
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Ask by Parsons Deleon. in the United States
Mar 24,2025

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An annuity is when you make equal, regular payments into an account that earns interest.

Solución

To determine which option best describes an annuity, let’s analyze the definitions:
  1. Deposits are made at random (whenever you have extra money) into an account earning interest.
    • This describes a flexible savings approach, not an annuity.
  2. A lump sum is deposited into an account earning compound interest.
    • This describes a one-time investment, not an annuity.
  3. A lump sum is deposited into an account earning simple interest.
    • This also describes a one-time investment, not an annuity.
  4. Equal, regular deposits are made into an account earning interest.
    • This is the correct description of an annuity, as it involves making consistent payments over time.
Therefore, the best description of an annuity is:
Equal, regular deposits are made into an account earning interest.

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The Deep Dive

An annuity is best described as a financial product where equal, regular deposits (also called payments) are made into an account that earns interest over time. This structured approach allows individuals to save systematically, often for retirement or a future goal, creating a predictable stream of payments.
In real-world scenarios, annuities can be a great tool for long-term financial planning. For example, many retirees invest in annuities to secure regular income, ensuring they have funds to cover living expenses without worrying about market fluctuations. These products can be tailored to fit various financial needs and risk tolerances!

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