Question

You are comparing two annuities, which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month.
Which one of the following statements is correct concerning these two annuities?
a. Both annuities are of equal value today.
b. Annuity B is an annuity due.
c. Annuity A has a higher future value than annuity B.
d. Annuity B has a higher present value than annuity A.
e. Both annuities have the same future value as of ten years from today.

Answer 1

Comparing two annuities (A and B), that offer 10 years of monthly payments, both are identical except payment date. A pays on the 1st, but B pays at the end of each month. Annuity A has a higher future value than B.

What do you mean by future value?

Future Value (FV) is a financial concept that assigns value to assets based on estimated variables such as future interest rates and cash flows. It is useful for investors to know what their investment will look like in five years and the expected return. For example, if you invest $1,000 in your savings account today at 2% annual interest, it will be worth $1,020 at the end of the year. Therefore, its future value is $1,020.

What is future value formula used for?

The Future Value (FV) formula is a financial term used to calculate the value of a future dated cash flow compared to the original receipt.

The simplest form of the future value (FV) formula is FV= PV*(1+i)^n. where "PV" is the present value, "i" is the interest rate, and "n" is the number of periods.

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