Question

Define annuity due. Would an investment be worth more if it were an ordinary annuity or an annuity due? Explain.

Answer 1

Investment annuity plays an important role is the quality analysis and risk of defaulting a security while the corporate issues a credit. The annuity due can be determined by considering the factors like: -

a. Earning of Corporation: - The growth of the corporation is determined by the earning it makes and whether it would be able to maintain it or not.

b. Future Plans: - The plans for expansion and effective utilization of resources play an important role in determining the worth of a corporation as assumptions would be framed accordingly.

c. Compliance with governing rules: - There is numerous binding compliance a corporate had to make to regulate its business in a particular sector and doing it efficiently succeeds it.

d. Goodwill in the Market: - The shares and bond yield or the credit rating is greatly influenced by the image an organization maintains in the market.

Duration helps in measuring the changes in bond with the rate of interest changes while the convexity is the interaction between the prices of bond and the yield or return expected as the changes occur in the interest rate.

The expectation of investors depends upon the investment made that can be long or short term depending upon the source and nature of their income.

Further, it had been concluded that in case of bond if other factors are constant then the Long Term Bond (Ordinary annuity) are more volatile then Short Term Bond (annuity due).