You Are Considering Two Equally Risky Annuities, Each of Which

question 58

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 a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
• B) If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
• C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
• D) The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

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Definitions:

Sales Offer

A promotional or sales activity making a specific proposal to entice customers to buy a product or service.

Goods

Physical items that are sold or traded, typically manufactured products or raw materials.

Business Transaction

An economic event with a third party that is recorded in an organization's accounting system.

Total Assets

The complete sum of everything a company owns or controls that has economic value, shown on the balance sheet.