Question

An ordinary annuity has a present value of $1,000,000. The annuity has monthly payments.

The interest rate on the annuity is 10% APR. Which of the following represents the present value

if this were an annuity due?

a. $1,000,000 x 1.01

b. $1,000,000 / 1.10

c. $1,000,000 / 1.008333333

d. $1,000,000 x 1.008333333

e. $1,000,000 x 1.10

If you double the initial investment, then the future value will be more than doubled for a multi-period investment, everything else equat (Hint: FV = PV x (1 +0)5)

a. True

b. False

Answer 1

Answer : 1) Correct Option is (d.) $1,000,000 x 1.008333333

Reason :

Annuity Due means that the payments are made at the beginning of Period .

If Present Value of Ordinary Annuity is 1,000,0000

Present Value of Annuity Due = Present Value of Annuity * (1 + rate per period)

= 1,000,000 * [1 + (0.10/12)]

= 1000000 * 1.00833333

Answer : False .

Resaon :

Let us Assume Initial Investment is 100,000

Interest rate is 5%

Number of period s= 5 years

Future Value = 100,000 * (1 + 0.05)^5

= 127,628.16

Let us Double the initial Investment other things remaining Constant

If we double the investment the future

Future Value = 200,000 * (1 + 0.05)^5

= 255,256.31