An annuity is described as which of the following?

• A. A financial instrument with a varying payment schedule
• B. A financial instrument purchased for an initial sum which then pays out the same amount yearly until a specified fixed time ends
• C. A loan that repays a principal at maturity
• D. A perpetuity that never ends

Answer: (B)

An annuity is a contract where you invest an initial sum and then receive the same cash payment each year for a fixed, finite period. The key idea is level payments over a defined payout horizon, not indefinite or varying amounts. This distinguishes it from a perpetuity, which would continue forever, and from a loan, where the borrower repays principal and interest over time. Here, the investor is the recipient of equal payments for a set number of years, ending when the term ends.