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

By choosing the annuity due, you receive the first payment at the beginning of the 8 years. This means you can reinvest the $5,000 immediately, allowing you to earn interest on it for an extra year. This will ultimately result in a higher overall return compared to the ordinary annuity.

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