Question

Which statement is true?
-All else equal, an ordinary annuity is more valuable than an annuity due.
-All else equal, a decrease in the number of payments increases the future value of an annuity due.
-An annuity with payments at the beginning of each period is called an ordinary annuity.
-All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.
-All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Answer 1

Answer:

-All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Explanation:

An annuity refers to payments received at a regular interval, e.g. monthly or yearly payments. Annuities can be divided into two types:

1. annuity due: payment is received at the beginning of the time period, e.g. rent received at the beginning of the month
2. ordinary annuity: payment is received at the end of the time period, e.g. you receive your salary at the end of the month

in order to calculate the present value of any future cash flow (including an annuity payment), you can use the present value formula for each individual payment ⇒ PV = FV / (1 + r)ⁿ. The higher the discount rate r, the lower the present value. When you want to calculate the future value, the opposite happens, the higher the r, the higher the future value.