If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then
A) the present value of the annuity due is less than the present value of the ordinary annuity.
B) the present value of the annuity due is greater than the present value of the ordinary annuity.
C) the future value of the annuity due is equal to the future value of the ordinary annuity.
D) the future value of the annuity due is less than the future value of the ordinary annuity.

Question

Quizplus · Accepted Answer

CAn annuity due involves payments at the beginning of each period, while an ordinary annuity involves payments at the end. For the present value, payments made sooner (as in an annuity due) are worth more today due to the time value of money, making the present value of an annuity due greater than that of an ordinary annuity. For the future value, both types of annuities will have different future values due to the timing of payments, but the statement C is incorrect as it suggests equality; the correct relationship is that the future value of an annuity due is greater because payments have more time to earn interest. However, since this specific comparison was not an option, the correct understanding is that their future values are not equal, with the annuity due generally having a higher future value.

If an Annuity Due and an Ordinary Annuity Have the Same