Why does an annuity due have a higher present value than a similar ordinary annuity?

Why does an annuity due have a higher present value than a similar ordinary annuity?

Solutions

Expert Solution

Annuity due means the cash flow will start from today but in case of ordinary annuity cash flow start after period end (say annual annuity therefore end of year 1).

Therefore in case of Annuity due person will earn interest on of additional 1 year and it will have compoundig effect.

In short Annuity due will have early cash flow as compared to ordinarly annuity and hence resulting higher present value as well as future value.

jeff jeffy answered 2 years ago

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