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An annuity is a kind of investment in which the investor gets a guaranteed return each year (or each of any given period). Therefore, the cash flow in an annuity is constant -- it follows a given pattern consistently.
In annuity cash flow, the investor always gets a specified payment at a specific interval. The payment is always the same and there is always the same interval between one payment and the next.
For example, then, buying stock does not give a person an annuity cash flow. The firms in which you buy stock may give dividends at fixed intervals, but the dividends are not likely to be the same every time. They will go up and down as the firm's fortunes change.
In a cash flow resulting from an annuity a sum of money is paid out by one party such as an insurance company, pension scheme, or a social welfare organization at regular intervals. This interval is generally yearly and the term annuity is derived from annual which means yearly. Individuals or groups may also pay annuities to firms like insurance companies. In this type of scheme they pay fixed installment of amounts for a give period, and in return receive a consolidated amount of money paid with interest after some time. Similarly it is possible to pay a lump sum amount at one time, and against it receive periodical fixed installments for a specified time. Annuities may also be used for leaving inheritance when a beneficiary of the inheritance receives a fixed periodical installment. The most common use of annuities is to provide old age pension.
An Annuity is a cash flow stream which adheres to a specific pattern. Namely, an Annuity is a cash flow stream in which the cash flows are level (i.e., all of the cash flows are equal) and the cash flows occur at a regular interval. The annuity cash flows are called annuity payments or simply payments. Thus, the following cash flow stream is an annuity.
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