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4. You are comparing two annuities that offer regular payments of $2,500 for five years and...

4.

You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Multiple Choice

  • These annuities have equal present values but unequal future values.

  • These two annuities have both equal present and equal future values.

  • Annuity B is an annuity due.

  • Annuity A has a smaller future value than annuity B.

  • Annuity B has a smaller present value than annuity A.

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Answer #1

Answer: Annuity B has a smaller present value than annuity A.

Annuity A will started to pay today. That means it is a annuity due. Similarly Annuity B will started to pay one month from today. That means it is an ordinary annuity. Its both present value and future value are different. Other things remaining the same, annuity due has higher present and future value when compared to ordinary annuity.

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