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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Annuity

Definition

An annuity is a regular stream of future cash receipts which can be purchased by an initial cash payment, or a regular stream of cash payments to repay an initial borrowing.

How is it used?

An annuity is an investment designed to provide a regular stream of income rather than a lump sum at maturity. This would suit for example an investor’s need to provide for a particular expense (such as school fees) over a number of years. A house mortgage structured with regular monthly payments over a number of years but no lump sum payment at maturity is similarly an annuity structure.

The regular payments are not necessarily equal. They can, for example, increase at a regular predetermined rate. This would be useful for an income stream ...

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