You Are Considering Two Equally Risky Annuities, Each of Which

question 117

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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