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Question
Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth-maximizing investor which annuity would you choose?
a. The annuity due.
b. The deferred annuity.
c. Either one, because as the problem is set up, they have the same present value.
d. Without information about the appropriate interest rate, we cannot find the values of the two annuities; hence we cannot tell which is better.
e. The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.
Answer
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