A Deferred Annuity Will Pay You $500 at the End

question 149

Multiple Choice

A deferred annuity will pay you $500 at the end of each year for 10 years,however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12) .What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100.

• A) $2,200
• B) $2,400
• C) $2,900
• D) $3,400

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Definitions:

Decision Making

The cognitive process of selecting a course of action among various alternatives, often involving a balance of risk and reward.

Neoclassical Economics

The dominant and conventional branch of economic theory that attempts to predict human behavior by building economic models based on simplifying assumptions about people’s motives and capabilities. These include that people are fundamentally rational; motivated almost entirely by self-interest; good at math; and unaffected by heuristics, time inconsistency, and self-control problems.

Behavioral Economics

The branch of economic theory that combines insights from economics, psychology, and biology to make more accurate predictions about human behavior than conventional neoclassical economics, which is hampered by its core assumptions that people are fundamentally rational and almost entirely self-interested. Behavioral economics can explain framing effects, anchoring, mental accounting, the endowment effect, status quo bias, time inconsistency, and loss aversion.

Rational Decision Making

A systematic process of defining problems, evaluating alternatives, and choosing the most optimal solution based on logical and analytical reasoning.