Supposed someone offered you the choice of two equally risky annuities,each paying $10,000 per year for five years.One is an ordinary (or deferred)annuity,the other is an annuity due.Which of the following statements is most correct?
A) The present value of the ordinary annuity must exceed the present value of the annuity due,but the future value of an ordinary annuity may be less than the future value of the annuity due.
B) The present value of the annuity due exceeds the present value of the ordinary annuity,while the future value of the ordinary annuity.
C) The present value of the annuity due exceeds the present value of the ordinary annuity,and the future value of the annuity due also exceeds the future value of the ordinary annuity.
D) If interest rates increase,the difference between the present value of the ordinary annuity and the present value of the annuity due remains the same.
E) Both answers a and d are correct.

Question

Quizplus · Accepted Answer

The present value of an annuity due is always greater than the present value of an ordinary annuity because the cash flows are received one period earlier, resulting in the extra period of compounding. The future value of an annuity due will also be greater than the future value of an ordinary annuity because of this extra period of compounding. Interest rate changes will affect both annuities equally, so answer choice D is incorrect. Answer choice A is incorrect because both the present value and future value of the annuity due are greater than those of the ordinary annuity.

Supposed Someone Offered You the Choice of Two Equally Risky