Which one of these statements concerning two annuities is correct? Assume both annuities have $1,000 annual cash flows for four years.

Question

Quizplus · Accepted Answer

An annuity due is more valuable than an ordinary annuity because it pays at the beginning of each period, allowing for an extra period of compounding. Therefore, the annuity due will have a higher present value compared to the ordinary annuity. The other statements are incorrect: A) The ordinary annuity pays at the end of each period, not the beginning. C) The annuity due will have the same number of payments as the ordinary annuity since both have four cash flows. D) The value of both annuities will be the same at the end of Year 4 only if the discount rate is zero. Otherwise, the annuity due will have a higher value at the end of Year 4 due to the extra period of compounding. E) Both annuities are not of equal value given any discount rate; the annuity due will have a higher present value.

Which One of These Statements Concerning Two Annuities Is Correct