You Are Considering Two Equally Risky Annuities, Each of Which

question 93

Multiple Choice

You are considering two equally risky annuities, each of which pays $25,000 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) 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.
• B) a rational investor would be willing to pay more for due than for ord, so their market prices should differ.
• C) 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.
• D) the present value of ord exceeds the present value of due, and the future value of ord also exceeds the future value of due.
• E) the present value of ord exceeds the present value of due, while the future value of due exceeds the future value of ord.

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Definitions:

Liter

A unit of volume equal to 1,000 milliliters or approximately 33.814 U.S. fluid ounces.

Meter

A device used to measure something, such as electricity, gas, or in the medical field, the concentration of a substance in the blood.

Milliliters

A unit of volume in the metric system, equal to one-thousandth of a liter.

Liter

A metric unit of volume equal to 1,000 cubic centimeters or approximately 0.26 gallons.