Answer:
Statement a. is correct.
Explanation:
The effective annual rate is always higher than the nominal interest rate, as the formula is clear for any number of periods, for any interest rate:
Effective Annual Rate of return = [tex](1 + \frac{i}{n})^n - 1[/tex]
Further if we calculate the present value of annuity due and ordinary annuity assuming 6 % interest rate, then:
Present value of annuity due =
[tex](1 + 0.06) \times 150 \times (\frac{1 - \frac{1}{(1 + 0.06)^3} }{0.06} )[/tex]
= 1.06 [tex]\times[/tex] $400.95
= $425.0089
Present value of ordinary annuity = [tex] 150 \times (\frac{1 - \frac{1}{(1 + 0.06)^3} }{0.06} )[/tex]
= $150 [tex]\times[/tex] 2.6730
= $400.95
Therefore, value of annuity due is more than value of ordinary annuity.
Statement a. is correct.
