You Are Considering Two Equally Risky Annuities,each of Which Pays

question 43

Multiple Choice

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

• A) The present value of ORD must exceed the present value of DUE,but the future value of ORD may be less than the future value of DUE.
• B) The present value of DUE exceeds the present value of ORD,while the future value of DUE is less than the future value of ORD.
• C) The present value of ORD exceeds the present value of DUE,and the future value of ORD also exceeds the future value of DUE.
• D) The present value of DUE exceeds the present value of ORD,and the future value of DUE also exceeds the future value of ORD.
• E) If the going rate of interest decreases from 10% to 0%,the difference between the present value of ORD and the present value of DUE would remain constant.

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Definitions:

Monthly

Pertaining to or occurring once every month.

Unit Sales

The total number of individual items or products sold by a company in a specific period.

Operating Leverage

Operating leverage is a measure of how revenue growth translates into growth in operating income, highlighting the impact of fixed costs on profitability.

Net Operating Income

A company's income after operating expenses are subtracted but before interest and taxes are deducted.