In comparing an ordinary annuity and an annuity due, which of the following is true?
A) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due.
B) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.
C) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
D) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.

Question

Quizplus · Accepted Answer

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity because each payment is received one period sooner, which results in more compounding periods. This means that the interest earned on each payment is added to the balance for one more period in an annuity due compared to an ordinary annuity.

In Comparing an Ordinary Annuity and an Annuity Due, Which