Question

You are comparing two annuities which offer annual payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first day of each year (i.e., the first payment will occur today) while annuity B pays on the last day of each year (i.e., the first payment will occur a year from today). Which one of the following statements is correct concerning these two annuities? Multiple Choice Both annuities are of equal value today. Annuity B is an annuity due. Annuity A has a higher future value than annuity B.

Answer 1

Annuity A pays on the first day of the year and is thus an annuity due, whereas Annuity B pays on last day of the year and is thus an ordinary annuity.

Because of the concept of the time value of money, an annuity that offers payments at the beginning of the period will have a higher future value due to more money being compounded periodically.

The answer is c) Annuity A has a higher future value than annuity B