(i) If the interest rate fluctuates or if the time interval changes, the annuity concept does not exist. Why? Explain. (ii) Why do lenders prefer a huge amount of down payment and why do borrowers prefer the least amount of down payment? Explain.

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(i) If the interest rate fluctuates or if the time interval changes, the annuity concept does not
exist. Why? Explain. (ii) Why do lenders prefer a huge amount of down payment and why do
borrowers prefer the least amount of down payment? Explain.

EXPERT ANSWER

An annuity is basically a type of insurance contract where the investor or an individual invests his funds and the investment is done for the long – term. The funds invested in the annuity are tied for a specific period of time as provided by the annuity policy.

If the interest rate fluctuates i.e if the interest rate rises or inflation, then the biggest disadvantage investor has is that he cannot invest in the other investment plan that carries comparatively the lower rate of interest as the funds in the annuity gets blocked for a longer period of time.

On the other hand, if the interest rate goes down when the investor has the time of his deposits near to maturity, then he would be left with no option other than to re-invest his amount in the annuity at that lower rate prevailing that would ultimately make his returns reduce.

So, in both the cases when the interest rate goes up or down, the annuity concept fails as the funds gets blocked of the investor for a longer period of time and he lefts with no other better option.