An annuity due can use the ordinary annuity formula if the ordinary annuity formula is adjusted:
Group of answer choices
Add one payment to total value
Multiply results by 1+i
Add two payments to total value
Subtract three payments from total value
To determine which adjustment is needed for an annuity due to use the ordinary annuity formula, let's first understand what an ordinary annuity is.
An ordinary annuity refers to a series of equal periodic payments or receipts made at the end of each compounding period. In other words, the payments occur at the end of each period. On the other hand, an annuity due refers to a series of equal periodic payments or receipts made at the beginning of each compounding period.
To adjust the ordinary annuity formula to calculate an annuity due, you need to make sure that the formula reflects the fact that payments are made at the beginning of each period instead of at the end. There are a few possible adjustments:
1. Add one payment to the total value: Since the annuity due starts with a payment at the beginning of the first period, adding one payment to the total value accounts for this additional payment. This adjustment aligns the formula with the timing of the annuity due.
2. Multiply results by (1+i): Another approach is to calculate the value of the ordinary annuity using the ordinary annuity formula and then multiply the result by (1+i), where "i" represents the interest rate. This adjustment accounts for the additional interest earned on the annuity due payment made at the beginning of each period.
3. Add two payments to the total value: This adjustment assumes that you make two additional payments at the end of the series of payments to account for the annuity due nature. By adding two extra payments to the total value, the formula considers the payment at the beginning of the first period and the payment at the beginning of the second period.
4. Subtract three payments from the total value: This adjustment assumes that you subtract three payments at the beginning of the series of payments to compensate for the annuity due nature. By subtracting three payments from the total value, the formula considers the omission of the payment at the end of the last period and the two payments at the end of the second-to-last and third-to-last periods.
It's important to note that which adjustment you choose depends on the specific context of the problem and the conventions followed in your calculations or financial analysis. Be sure to carefully read the problem statement or consult relevant guidelines to determine the appropriate adjustment for an annuity due.