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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Definitions:

Life Estate

A legal arrangement where an individual is given the right to use and benefit from property for the duration of their life, after which the property reverts to another designated party.

Easement

A legal right to use another person's land for a specific, limited purpose, without owning it.

Sever

To cut off, remove, or divide a part of something, often used in legal contexts to describe the separation or termination of legal rights or duties.

Chattels

Personal property or movable possessions, as opposed to real property which includes land and buildings.