Investment A will make N annual payments of $500 with the first of the N payment

Question

Investment A will make N annual payments of $500 with the first of the N payments due immediately. Investment A has a value of $20,000. Investment B is an ordinary annuity that will make (N minus 1) annual payments of $500 with the first payment due in one year from today. If investment A and investment B have the same expected return, then what is the value of investment B?

1. The value of investment B can be determined from the information given, but it is not equal to $19,500, $20,000, or $20,500

2. The value of investment B can not be determined from the information given

3. $20,000

4. $20,500

5. $19,500

1. The value of investment B can be determined from the information given, but it is not equal to $19,500, $20,000, or $20,500

2. The value of investment B can not be determined from the information given

3. $20,000

4. $20,500

5. $19,500

Explanation / Answer

Value of investment B = value of investment A - 500

value of B = 20,000 - 500 = 19,500

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