Question

Is this statement true or false? If one set up time lines for an ordinary annuity of $1,000 per year for 3 years and a 3-year, $1,000 annuity due, the primary difference between the two time lines is that the $1,000 payments for the annuity due would begin at t = 0 and end at t = 2, whereas the ordinary annuity's payments would begin at t = 1 and end at t = 3.

a. True
b. False

Answer 1

The statement is true; in an ordinary annuity, payments are made at the end of each period, while in an annuity due payments are made at the beginning of each period.

Step-by-step explanation:

The statement is true. The main distinction between an ordinary annuity and an annuity due is the timing of the payments. With an ordinary annuity, payments are made at the end of each period, while with an annuity due, payments are made at the beginning of each period. In the context of the question, for an ordinary annuity of $1,000 per year for 3 years, payments would be made at the end of Year 1 (t = 1), Year 2 (t = 2), and Year 3 (t = 3). However, for a 3-year, $1,000 annuity due, the payments would start at the beginning of Year 1 (t = 0), then continue at the beginning of Year 2 (t = 1), and finally at the beginning of Year 3 (t = 2).