Question 4

Monthly payments by customers to a cell phone provider for services on a 2-year contract illustrate an annuity.

An annuity is characterized by a series of equal payments made at regular intervals. The monthly payments made by customers to a cell phone provider align perfectly with this definition, as they represent consistent, scheduled payments over a specified period.

A) Payment by credit card customer on their purchases from last month

This option is incorrect because it describes a one-time payment for past purchases. An annuity involves multiple payments over time rather than a single transaction.

B) Monthly payments by customers to a cell phone provider for services on a 2-year contract

This option is correct as it represents a series of equal payments made at regular intervals (monthly) over a defined period (2 years), which fits the definition of an annuity.

C) Purchase of inventory by a manufacturing firm for use over multiple periods

This option is incorrect because it refers to a single purchase of goods rather than a series of payments. Annuities require repeated financial transactions, not one-time purchases.

D) One-time purchase of a cell phone at the beginning of a 2-year service agreement

This option is also incorrect as it describes a single transaction rather than a series of payments. Annuities are defined by multiple payments rather than one-time purchases.

Conclusion

Option B is definitively the correct answer as it embodies the key characteristics of an annuity: regular, equal payments over a specified duration. The other options do not meet this criterion, as they describe either one-time payments or purchases that lack the recurring nature essential to annuities.