Which of the following best describes an annuity?

• A. A contract to buy or sell a specific asset at a predetermined price in the future.
• B. A single lump-sum payment made at the end of an investment period.
• C. A type of security that represents ownership in a corporation.
• D. A series of equal payments made at regular intervals over a specified period of time.

Answer: (D)

Verified step by step guidance

1. Understand the definition of an annuity: An annuity is a financial product or arrangement where a series of equal payments are made at regular intervals over a specified period of time. These payments can occur annually, semi-annually, quarterly, or monthly.
2. Differentiate an annuity from other financial terms: For example, a contract to buy or sell a specific asset at a predetermined price in the future refers to a futures contract, not an annuity. Similarly, a single lump-sum payment is not an annuity because it involves only one payment, and ownership in a corporation refers to equity or stock, not an annuity.
3. Recognize the key characteristics of an annuity: Regular intervals and equal payments are the defining features of an annuity. These payments can be structured for a fixed period or for the lifetime of the annuitant.
4. Consider examples of annuities: Common examples include retirement income plans, insurance payouts, or structured settlements where payments are made periodically.
5. Apply the definition to identify the correct answer: Based on the characteristics of an annuity, the correct description is 'A series of equal payments made at regular intervals over a specified period of time.'