Question

13. When comparing an annuity due to an ordinary annuity with the same time horizon, payment, interest rate, and compounding periods, the annuity due will have higher: A. future values, but not present values B. present values, but not future values C. future values and present values D. none of the above

Answer 1

Answer - Option C

For the present values,

1 -(1 + i) PV of an Ordinary Annuity - D 1- (1 + i) - PV of an Annuity Due =R*— *(1 + i)

Based on these formula,

PV of Annuity due = (1 + i) * PV of ordinary annuity.

For Future value

[(1+r) -1 FV of Annuity = P P= Periodic Payment r=rate per period n = number of periods

- 1] FV of Annuity Due = (1 + r) x P P= Periodic Payment r=rate per period n = number of periods

FV of Annuity due = (1 + i) * FV of ordinary annuity.

Based on these relations, we can say FV and PV of annuity due is always higher.