You are considering two equally risky annuities, each of which pays $5,000 per y
ID: 1233005 • Letter: Y
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, while Investment DUE is an annuity due. Which of the following statements is CORRECT?A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
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.
The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.
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.
Explanation / Answer
The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
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