You Are Comparing Two Investment Options

question 89

Multiple Choice

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statement is correct given these two investment options?

• A) Both options are of equal value given that they both provide $20,000 of income.
• B) Option A is the better choice of the two given any positive rate of return.
• C) Option B has a higher present value than option A given a positive rate of return.
• D) Option B has a lower future value at year 5 than option A given a zero rate of return.
• E) Option A is preferable because it is an annuity due.

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Definitions:

Equity

The worth of a stake in property ownership, such as the equity held by shareholders in a company.

Dealer Market

A financial market where dealers buy and sell securities for their own accounts, acting as principals in the transaction.

Securities

Financial instruments that represent either ownership (stocks), a debt agreement (bonds), or rights to ownership (derivatives) that can be bought and sold.

Primary Market

The financial market where new securities are issued and sold for the first time, typically through public offerings or private placements.