Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,600 monthly. The contract currently sells for $66,000.

a.	What is the monthly return on this investment vehicle?

b.	What is the APR?

c.	What is the effective annual rate?

Answer 1

a) Given that monthly payment = $1600

PV of the contract = $ 66000

for a perpetuirty monthly interest rate = monthly payment/PV

=1600/66000= 2.42%

Monthly interest rate = 2.42%

b) APR= 12* Monthly interest rate

APR= 12*2.42%

APR=29.1%

c)Effective annual rate (EAR)=( (1+APR/n)^n)-1

EAR= ((1+0.291/12)^12)-1 =33.30%

So, EAR = 33.30%