You Are Comparing Two Annuities with Equal Present Values

question 5

Multiple Choice

You are comparing two annuities with equal present values.The applicable discount rate is 7.25 percent,compounded annually.One annuity pays $6,500 on the first day of each year for 20 years.How much does the second annuity pay each year for 20 years if it pays at the end of each year?

• A)$5,581.40
• B)$6,060.61
• C)$6,028.75
• D)$6,971.25
• E)$7,086.50

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Definitions:

Swap Contract

An agreement between two parties to exchange sequences of cash flows for a set period of time according to predetermined terms.

Forward Contract

An agreement customized for two individuals to either buy or sell a particular asset at a price decided upon for a future date.

Hedging

A strategy used to reduce or eliminate the risk of adverse price movements in an asset, often by taking an offsetting position in a related security.

Transformation Process

The series of actions or operations conducted in manufacturing or service environments that convert inputs into finished products or outcomes.