Question

Which statement is true? a. All else equal, an ordinary annuity is more valuable than an annuity due. b. All else equal, a decrease in the number of payments increases the future value of an annuity due. c. An annuity with payments at the beginning of each period is called an ordinary annuity.d. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. e. All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

Answer 1

Answer: All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Explanation:

This is so, as increasing the interest rate will increase factors affecting the future value.

∴ With an increase in the discount rate , there will be a decreases in factors affecting the present value. This is because a higher interest rate denotes that in present terms we would have to keep the reduction aside to earn a specified amount in the future.

In an ordinary annuity, payments are received at the end of the time period stated. Payments are either received or made at the beginning of the time period.