Which one of the following statements related to annuities and perpetuities is correct?

Question

Quizplus · Accepted Answer

A perpetuity is a stream of equal payments that continues indefinitely, while an annuity is a stream of equal payments that has a set end date. The present value of a perpetuity can be calculated using the formula PV = PMT/r, where PMT is the constant payment, and r is the discount rate. The present value of an annuity can be calculated using the formula PV = PMT [(1- (1+r)^-n) / r], where n is the number of periods. Therefore, a perpetuity comprised of $100 monthly payments would be worth more than an annuity of $100 monthly payments, because the perpetuity continues indefinitely whereas the annuity has a set end date. Option A is incorrect because the present value of an ordinary annuity is less than an annuity due, given equal annual cash flows at the same interest rate, because the payments in an ordinary annuity are made at the end of each period, while the payments in an annuity due are made at the beginning of each period. Option C is incorrect because most loans have a set end date and are therefore considered annuities. Option D is incorrect because both the present value and future value of a perpetuity can be calculated. Option E is incorrect because perpetuities are indefinite while annuities are finite.

Which One of the Following Statements Related to Annuities and Perpetuities