CMA Intermediate · Financial Management and Business Data Analytics · Time Value of Money
Compared with an ordinary annuity of the same amount, term and rate, an annuity due has which relationship for its present value?
The present value of an annuity due is higher than that of an ordinary annuity by a factor of (1 + r). Each payment is received one period earlier, so it is discounted for one fewer period, raising the total value proportionally.
- AHigher by a factor of (1 + r)Correct
- BLower by a factor of (1 + r)
- CEqual, since the number of payments is the same
- DHigher by exactly one payment amount
Explanation
In an annuity due each payment occurs one period earlier, so each is discounted one period less. PV of annuity due = PV of ordinary annuity × (1 + r). It is not exactly one payment higher except by coincidence.
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