Question

12.) Consider the future value of an ordinary annuity and an annuity due. a.) Define each and explain the difference between these two types of annuities. (Hint: Begin by defining each. Then explain the difference. Use complete sentences.) b.) Which of these plans will produce a greater value at the end of the total time period for the annuity? Why is this so? (Use complete sentences to answer.) Show work

Answer 1

a)

	future value of an ordinary annuity	future value of an annuity due
Definition	It is a future value of amount invested at end the of period at an interest rate of (i%) for n years.	It is a future value of amount invested at beginning of period or immediately at an interest rate of i% for n year.
Difference	Under Ordinary annuity ,Payments are made at end of period	Under Annuity due ,Payments are made immediately or at beginning of period

b)Annuity due will produce greater value at end of total time period .This is so because when amount is invested at beginning of period ,you will receive interest on that whereas when amount is invested at end of period ,Interest is forgone on same.

	future value of an ordinary annuity	future value of an annuity due
Amount of investment	500	500
i	10%	10%
n	1year	1 year
Future value	The future value of amount invested at end of period will be $ 500 only since no interest is accrued as investment is made at end of period	The future value of amount invested at beginning of period will be 500 plus (500*10%= 50) = 550 since investment is made at beginning period so interest is accrued for one year at the end of year.