What characterizes a simple annuity?

A simple annuity is characterized by the fact that the compounding frequency and the payment frequency are identical. This means that when payments are made, they coincide with the intervals at which interest is calculated. For instance, if payments are made monthly, the interest on the investment or loan is also compounded monthly. This structure facilitates the management and understanding of cash flows over time, as each payment reflects a consistent amount and scheduled regularity.

The option stating that payments are made only at the end of the loan term pertains to a different type of financial arrangement, where payments might be deferred until a single larger payout is made. Options discussing compounding frequency that exceeds or differs from the payment frequency indicate a misalignment in how interest accrues versus how cash flows are managed, which does not align with the characteristics of a simple annuity. Lastly, a simple annuity typically involves fixed payments, rather than variable payments that change over time, making a clear distinction from annuities that may have varying payment amounts.