Question

1) Which would result in more savings at the end ...... an ordinary annuity or an annuity due savings plan of the same amount and the same interest rate. Please explain.

2) David Clancy issues $2,000,000 of 7% bonds due in 10 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 8%. What amount will Clancy receive when it issues the bonds?

3) Was the above bond issued at a discount or premium? and secondly, what would be the journal entry to record the initial issuance of the bond on the books of the issuer?

Answer 1

1)Annuity due means an annuity the payment of which gets due immediately at the beginning of each period. On the other hand, under an ordinary annuity, payments are made at the end of each period. Due to this reason, annuity due proves to be more beneficial for the recipients because they can utilize the funds faster. In simple words, persons who pay annuity due do not have the opportunity to utilize for an entire period. Hence, individuals paying annuities prefer ordinary annuities.

Considering the above, it can be said that annuity due would result in more savings at the end due to its higher future value than ordinary annuity by a factor of one plus periodic interest rate.