You have the choice of two equally risk annuities,each paying $5,000 per year for 8 years.One is an annuity due and the other is an ordinary annuity.If you are going to be receiving the annuity payments,which annuity would you choose to maximize your wealth?
A) the annuity due
B) the ordinary annuity
C) Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better.
D) either one because they have the same present value

Question

Quizplus · Accepted Answer

An annuity due pays at the beginning of each period, while an ordinary annuity pays at the end of each period. Because of the time value of money, receiving payments at the beginning of each period is more advantageous as the money can be invested and start earning interest immediately. Therefore, the annuity due will provide more value over the 8-year period compared to the ordinary annuity.

You Have the Choice of Two Equally Risk Annuities,each Paying