Question
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,
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 DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
b. 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.
c. A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
d. The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.
e. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started