Question

Regular contributions of $200 are made at the end of each month for five years into a savings account earning interest at 4% compounded quarterly. The annuity can be classified as:

A) Ordinary simple annuity
B) Ordinary annuity due
C) Ordinary general due
D) This is not an annuity

Answer 1

The contributions to the savings account qualify as an Ordinary simple annuity, which involves equal payments made at regular intervals with interest compounding on these contributions over time.

Step-by-step explanation:

The question concerns an annuity, which is a series of equal payments made at regular intervals. In this scenario, the contributions are $200 at the end of each month for five years into a savings account with a 4% interest rate compounded quarterly. Since contributions are made at the end of each period, it can be classified as an Ordinary simple annuity.

The power of compound interest is highlighted by the fact that interest is added to the principal, so that each subsequent interest calculation is on an increased base. Over time, this can result in a significant amount of interest earned, as demonstrated by the provided example where a $3,000 investment compounding at 7% annually grows nearly fifteen fold over a span of 40 years.