You are considering two equally risky annuities, each of which pays
$5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?
A) The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
B) If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
D) The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Question

Quizplus · Accepted Answer

An annuity due has payments at the beginning of each period, so its present value is higher than that of an ordinary annuity, which has payments at the end of each period.

You Are Considering Two Equally Risky Annuities, Each of Which