Question

You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?A) To be the perpetuity, the payments must occur on the first day of each monthly periodB) The ordinary annuity would be more valuable than the annuity due if both had a life of 10 yearsC) The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity dueD) The future value of all three investments must be equalE) The present value of all three investments must be equal

Answer 1

Answer:

c. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due

Explanation:

Considering the following statements:

• the ordinary perpetuity, the payments must occur on the first day of each monthly period. Hence this statement is incorrect.
• The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years. Incorrect.
• In case of perpetuity the times is not limited, hence would get the higher return.