Asked by Sonja Knezic on Jun 23, 2024
Verified
You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is correct?
A) 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.
B) 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.
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
D) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.
Annuity Due
An annuity for which the payments are made at the beginning of each period, as opposed to the end in a regular annuity.
Ordinary Annuity
A series of equal payments made at regular intervals, with the distinguishing characteristic that payments are made at the end of each period.
Present Value
Today's value of money or cash flows to be received in the future, determined by applying a given rate of return.
- Understand the difference between ordinary annuities and annuities due and their valuation.
Verified Answer
BR
Brittany RobertsJun 28, 2024
Final Answer :
D
Explanation :
An annuity due (DUE) has payments at the beginning of each period, so its present value and future value are both higher than those of an ordinary annuity (ORD), which has payments at the end of each period.
Learning Objectives
- Understand the difference between ordinary annuities and annuities due and their valuation.