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 is an annuity whose payments occur at the beginning of each period. Because of the time value of money, the present value of an annuity due will always be greater than the present value of an ordinary annuity with the same parameters. Therefore, statement A is correct.

B) is incorrect because the effective rate can be greater than the nominal rate depending on the compounding frequency.

C) is also incorrect because the effective rate takes into account the effect of compounding and will be equal to the nominal rate for an annual payment loan or investment.

D) is incorrect because the proportion of the payment that goes toward interest decreases over time on a fully amortized loan.

Which of the Following Statements Is CORRECT