Which of the following statements is CORRECT? Answer The present value of a 3-ye

Question

Which of the following statements is CORRECT?
Answer
The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

Explanation / Answer

CORRECT: The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. This is because in the annuity due, the payments are made at the beginning of each time period; and in an ordinary annuity, the payments are made at the end of the time period.

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