Question

Which one of the following is correct concerning ordinary annuities and annuities due?

Multiple Choice
a) An annuity due will have a larger future value than an ordinary annuity given that the annuities are otherwise identical.
b) An ordinary annuity is one where the payment occurs at the beginning of the period.
c) An annuity due applies only to equal payments made in annual increments.
d) The majority of annuities are annuities due.
e) An ordinary annuity will have a larger present value than an annuity due given that the annuities are otherwise identical.

Answer 1

An annuity due will have a larger future value than an ordinary annuity given that the annuities are otherwise identical. An ordinary annuity is one where the payment occurs at the end of the period. For example, if you have two annuities with the same payments, interest rate, and time period, the annuity due will accumulate more value over time because the payments start earning interest earlier.

Step-by-step explanation:

The correct option among the given choices is a) An annuity due will have a larger future value than an ordinary annuity given that the annuities are otherwise identical.

An ordinary annuity is one where the payments occur at the end of each period, while an annuity due is one where the payments occur at the beginning of each period.

For example, if you have two annuities with the same payments, interest rate, and time period, the annuity due will accumulate more value over time because the payments start earning interest earlier.