Financial Mathematics: Annuities Quiz

Questions and Answers

What is the primary difference between an ordinary annuity and an annuity due?

An ordinary annuity payment is made at the end of a period, while an annuity due payment is made at the beginning of a period. (correct)

An ordinary annuity involves more payments than an annuity due.

There is no difference between the two.

An ordinary annuity payment is made at the beginning of a period, while an annuity due payment is made at the end of a period.

Which measure of central tendency is least affected by outliers in a dataset?

Median (correct)

Mode

Range

Mean

What type of portfolio is best described for a risk-averse investor?

Primarily invested in bonds and fixed-income securities. (correct)

Concentrated in a single, high-gain stock.

Equally invested in stocks, bonds, and real estate.

Heavily invested in stocks of companies with high growth potential.

Which investment option would generally yield the highest return after 5 years?

Investing Rs. 1,00,000 at a compound interest rate of 10% compounded monthly. Signup and view all the answers

What does diversification in investing primarily aim to achieve?

Minimizing risk by spreading investments across various assets. Signup and view all the answers

If you have a portfolio predominantly in fixed-income securities, what might this indicate about your investment strategy?

You may have a conservative investment strategy. Signup and view all the answers

How does compound interest differ from simple interest?

Simple interest does not earn interest on interest. Signup and view all the answers

Which of the following statements about cash flows in an annuity is correct?

An annuity involves equal cash flows made at regular intervals. Signup and view all the answers

Study Notes

Annuities

An annuity consists of equal cash flows occurring at regular intervals.
Ordinary annuity: Payments are made at the end of each period.
Annuity due: Payments are made at the beginning of each period.
Key difference: Timing of payments impacts the present value and total amount received.

Measures of Central Tendency

Mean: The average of a dataset, highly influenced by outliers.
Median: The middle value when data is ordered, least affected by outliers.
Mode: The most frequently occurring value in a dataset, can be affected by outliers both positively and negatively.
Range: Difference between the maximum and minimum values, sensitive to extreme outliers.

Risk-Averse Investor Profile

A risk-averse investor typically prioritizes capital preservation over high returns.
Common strategies include investing in bonds and fixed-income securities for stability.
Heavily investing in dividend-paying stocks generates income with moderate risk.
Diversification across various asset classes can mitigate risk.

Investment Returns Comparison

Simple interest: Interest calculated solely on the initial principal, lower overall returns.
Compound interest: Interest calculated on the principal plus any accumulated interest, yields higher returns over time.
Compounding frequency matters; more frequent compounding (like half-yearly) increases the total return significantly.
Understanding these differences helps maximize investment outcomes.

Diversification in Investing

Diversification reduces risk by spreading investments across various asset types.
Investing all funds in one stock is riskier and not advisable.
Different types of assets (stocks, bonds, real estate) provide a buffer against market fluctuations.
Not limited to diversifying through different companies; overall asset distribution is key.

Description

Test your understanding of annuities with this quiz focusing on the differences between ordinary annuities and annuities due. This quiz will help clarify when payments are made in relation to the periods they're associated with. Perfect for students of finance or accounting!