Suppose Someone Offered You Your Choice of Two Equally Risky

question 17

Multiple Choice

Suppose someone offered you your choice of two equally risky annuities,each paying $5,000 per year for 5 years.One is an annuity due,while the other is a regular (or deferred) annuity.If you are a rational wealth-maximizing investor which annuity would you choose?

• A) The annuity due.
• B) The deferred annuity.
• C) Either one,because as the problem is set up,they have the same present value.
• D) Without information about the appropriate interest rate,we cannot find the values of the two annuities;hence we cannot tell which is better.
• E) The annuity due;however,if the payments on both were doubled to $10,000,the deferred annuity would be preferred.

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