Answer to Question #200981 in Financial Math for mandona

Question

What is an annuity? 2. Differentiate between ordinary and due annuities. 3. Define an amortised debt. 4. Discus sinking fund.

Answer 1

1. An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.
2. An ordinary annuity is when a payment is made at the end of a period. An annuity due is when a payment is due at the beginning of a period. 
3. With amortized debt, the borrower makes scheduled principal and interest payments over the life of the loan.
4. A sinking fund is a fund containing money set aside or saved to pay off a debt or bond. A company that issues debt will need to pay that debt off in the future, and the sinking fund helps to soften the hardship of a large outlay of revenue.