Question

Annuity A has a present value of $100,000 and makes 20 payments. Annuity B has a present value of $100,000 and makes 18 payments. All else equal, which one has the higher payment?

Answer 1

Given that,

Annuity A has present value of $100000 and makes 20 payments

Similarly, Annuity B has present value of $100000 and makes 18 payments

payment formula for an ordinary annuity is

PMT = PV*r/(1 - (1+r)^-t)

So for the two annuity, only change is number of payment t.

As t increases, (1+r)^-t decreases and since it is in negative and in denominator, PMT will decrease.

so higher the number of payments, lower the periodic payment.

So here Annuity B has higher payments.