You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?
A) if the going rate of interest decreases from 10% to 0%, the difference between the present value of ord and the present value of due would remain constant.
B) the present value of ord must exceed the present value of due, but the future value of ord may be less than the future value of due.
C) the present value of due exceeds the present value of ord, while the future value of due is less than the future value of ord.
D) the present value of ord exceeds the present value of due, and the future value of ord also exceeds the future value of due.
E) the present value of due exceeds the present value of ord, and the future value of due also exceeds the future value of ord.

Question

Quizplus · Accepted Answer

An annuity due is worth more than an ordinary annuity because each payment is received one period earlier. Therefore, the present value of Investment DUE will be greater than that of Investment ORD. Additionally, since both annuities are equal in terms of risk, the higher present value of Investment DUE implies that the future value of Investment DUE will also be greater than that of Investment ORD. Option E is the only answer choice that reflects these facts.

You Are Considering Two Equally Risky Annuities, Each of Which