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Investment A is an annuity due and Investment B is an annuity. All else equal, which...

Investment A is an annuity due and Investment B is an annuity. All else equal, which one will have the lower future value?

A

B

A=B

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Answer #1

Annuity due means investments are made at beginning of the year and normal annuity means where payment are made at the end of the year.

Hence for annuity due overall, annuity has longer time to compound as compared to normal annuity.
Lets take example of 2 year 100 annuity with 10% interest rate and find the future price

Annuity Due Future Value = 100 (1.1) ^2 + 100 (1.1)^1 = 231

Normal Annuity Future Value = 100 (1.1) ^1 + 100 = 210

Hence we observe that annuity due has higher future value.

Correct option A

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