Economics · Financial Management
A corporate client intends to establish a sinking fund to redeem debentures worth 50,000,000 at the end of 10 years and decides to make equal annual deposits at the beginning of each year into an account yielding 9 percent per annum compounded annually. Considering the specific timing of these cash flows which aligns with the definition of an annuity due, what would be the characteristic behavior of the future value in this scenario compared to an ordinary annuity?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The future value will be calculated using only the simple interest method due to the regulatory guidelines of the sinking fund.
- 2The future value will be higher than an ordinary annuity by a factor equivalent to one plus the interest rate.✓
- 3The future value will be exactly the same as an ordinary annuity because the interest rate and time remain constant.
- 4The future value will be lower than an ordinary annuity because payments are made earlier in the period.
Correct answer
The future value will be higher than an ordinary annuity by a factor equivalent to one plus the interest rate.
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