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?

A) These two annuities have equal present values as of today and equal future values at the end of year five.
B) These two annuities have equal present values but unequal futures values at the end of year five.
C) Annuity A has a smaller future value than annuity B.
D) Annuity B is an annuity due.
E) Annuity B has a smaller present value than annuity A.

Answer 1

Answer:

E) Annuity B has a smaller present value than annuity A.

Explanation:

A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity and Compounding of these values is known as the future value of annuity.

Annuity paid at the start of each period is advance annuity and paid at the end of each period is ordinary annuity.

While Calculating the present value of the annuity, the Present value of advance annuity is higher than the present value of ordinary annuity.