You Are Considering Two Equally Risky Annuities, Each of Which

question 92

Multiple Choice

You are considering two equally risky annuities, each of which pays $15, 000 per year for 20 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) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
• 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 DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

---

Definitions:

Exponential Service Times

A statistical concept used in queueing theory where the times between arrivals of service requests follow an exponential probability distribution.

Arrival Rate

The frequency at which units, entities, or events arrive or occur over a specified period, often assessed in queuing theory and logistics.

Service Rate

The speed at which a service provider can deliver its service to customers.

Waiting Line

Refers to the process where customers or items wait in line for service or processing, commonly studied to improve efficiency in operations management.