Question
In: Finance
Professor’s Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $84,000 at...
Professor’s Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $84,000 at age 80, the firm will pay the retiring professor $9,000 a semi-annual until death. If the professor’s remaining life expectancy is 10 years, what is effective annual interest rate on this annuity?
11.32%
18.14%
17.38%
8.69%
Solutions
Expert Solution
Present Value at age 80 of annuity = $84,000
Semi-annual periodic annuity = $9000
No of annuity payments = 10 years*2 = 20
Calculating the Semi-annual Interest rate earned on annuity using Excel "RATE" function:-
Semi-annual Interest rate = 8.691%
Calculating its Effectiev Annual Interest rate :-
Where,
r = Semi-annual Interest rate = 8.691%
m = no of times compounding in a year = 2 (compounded semi-annually)
EAR =1.1814 - 1
EAR = 18.14%
So, effective annual interest rate on this annuity is 18.14%
Option 2
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jeff jeffy answered 2 years agoRelated Solutions
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