Suppose you have a choice of two equally risky annuities, each paying $1,000 per year for 20 years. One is an annuity due, while the other is an ordinary annuity. Which annuity would you choose?
A) the ordinary annuity
B) the annuity due
C) either one because the annuities have the same present value
D) without information about the appropriate interest rate, we cannot tell which annuity is better

Question

Quizplus · Accepted Answer

The annuity due is the better choice because it pays the first installment immediately, which has a higher present value than all subsequent payments. Therefore, the annuity due has a higher present value than the ordinary annuity, making it the better choice.

Suppose You Have a Choice of Two Equally Risky Annuities