Which of the following is NOT true regarding the total payment in an equal payment amortization table?
A) The total payment for any period is equal to the principal plus interest payments for that same period.
B) The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment.
C) The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate.
D) All of the above are true.
Question 2
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 value 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.
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