Which of the following statements are correct?
(A) The amount (future value) of a perpetuity is a finite sum.
(B) A sinking fund is set up for a particular purpose and is to be used at a particular time.
(C) A savings account is set up for any purpose that it may serve.
(D) In the flat rate method, the interest is calculated on the original loan amount for the whole term of the loan.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (B), (C) and (D) only
A perpetuity is an annuity whose payments continue for ever, so the total of the payments with their interest keeps growing without limit; only its present value is a fixed number.
A sinking fund and a savings account both set money aside for the future, but the sinking fund is meant for one particular purpose at one particular time, while a savings account can serve any purpose.
In the flat rate method, interest is charged on the full original loan for the whole term, even though the loan is being paid off.
So the amount of a perpetuity is not finite, the sinking fund is tied to one purpose and time, the savings account is for any purpose, and flat rate interest is on the original loan.
Checking the statements
(A) The amount (future value) of a perpetuity is a finite sum. — Incorrect. The payments never stop, so the amount grows beyond all bounds and is undefined.
(B) A sinking fund is set up for a particular purpose and is to be used at a particular time. — Correct. This is how a sinking fund differs from a savings account.
(C) A savings account is set up for any purpose that it may serve. — Correct. A savings account is not tied to one purpose.
(D) In the flat rate method, the interest is calculated on the original loan amount for the whole term of the loan. — Correct. Flat interest ignores the repayments made.