Question

If the present value of an ordinary, 6-year annuity is $8,100 and interest rates are 9.5 percent, what's the present value of the same annuity due?

a) $8,100
b) $9,269.50
c) $9,097.22
d) $7,386.86

Answer 1

The present value of an annuity due is higher than that of an ordinary annuity. By multiplying the ordinary annuity's present value by (1 + interest rate), one can obtain the present value of the annuity due, which in this case is $8,869.50.

Step-by-step explanation:

If the present value of an ordinary, 6-year annuity is $8,100 and interest rates are 9.5 percent, the present value of the same annuity due will be higher because payments are received at the beginning of each period instead of the end. To calculate the present value of the annuity due, you take the present value of the ordinary annuity and multiply it by (1 + interest rate). In this case, $8,100 * (1 + 0.095) = $8,869.50. Therefore, the correct answer is b) $8,869.50.