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You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Multiple Choice
a.These annuities have equal present values but unequal future values.
b.These two annuities have both equal present and equal future values.
c.Annuity B is an annuity due.
d.Annuity A has a smaller future value than annuity B.
e.Annuity B has a smaller present value than annuity A.

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Answer:

E) Annuity B has a smaller present value than annuity A.

Explanation:

The main premise in finances is that the value of money increases in time, e.g. one dollar today is worth more than one dollar tomorrow.

In this case, annuity A is an annuity due (payment is made at the beginning of each period). An annuity due that has the same payments and the same rates, will always have a higher present value than an ordinary annuity.

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