You are evaluating two annuities. They are identical in every way except that on

Question

You are evaluating two annuities. They are identical in every way except that one is an ordinary annuity and the other is an annuity due. Which of the following is FALSE?

A. The ordinary annuity must have a higher present value than the annuity due.

B. The ordinary annuity must have a lower future value than the annuity due.

C. The two annuities will differ in present value by the amount (1+r).

D. The annuity due and the ordinary annuity will make the same number of total payments over time.

A. The ordinary annuity must have a higher present value than the annuity due.

B. The ordinary annuity must have a lower future value than the annuity due.

C. The two annuities will differ in present value by the amount (1+r).

D. The annuity due and the ordinary annuity will make the same number of total payments over time.

Explanation / Answer

Answer : A is false.

PV of Annuity due must be higher than the PV of ordinary annuity. This is because the Annuity due is payed / received at the start of the duration whereas for ordinary annuity , the event occurs at the end of the year.

B, C , D are True.

PV(Annuity Due) = (1+r) * PV(Ordinary Annuity)  

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