You are comparing two annuities which offer quarterly payments of $2,500 for fiv

Question

You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities? Annuity A has a smaller future value than annuity B. These two annuities have equal present values but unequal futures values at the end of year five. These two annuities have equal present values as of today and equal future values at the end of year five. Annuity B is an annuity due. Annuity B has a smaller present value than annuity A.

Explanation / Answer

The correct answer is: Annuity B has a smaller present value than annuity A.

As we know, in annuity A payments occur at the beginning of the period hence it is an annuity due. And in annuity B payments occur at the end of the period hence it is an ordinary annuity.

An annuity due always has PV and FV bigger than an ordinary annuity all else being equal.

I hope my solution solves your query.

Regards.

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