Question

You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?These two annuities have both equal present and future values.These annuities have equal present values but unequal future values.Annuity B has a smaller present value than annuity A.Annuity A has a smaller future value than annuity B.Annuity B is an annuity due.

Answer 1

The answer is: Annuity B has a smaller present value than annuity A.

Step-by-step explanation:

The present value is the current value of a future cash flow. Money today is worth more than money earned tomorrow or in a year. So the sooner you receive a payment, its present value will be higher.

For this question, annuity A starts paying TODAY (higher present value), while annuity B starts paying in ONE MONTH.