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The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will...

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. Suppose a sales associate told you the policy costs $475,000. At what interest rate would this be a fair deal? (Round your answer to 2 decimal places. (e.g., 32.16))

Solutions

Expert Solution

For a perpetuity, interest rate = Annual cash flow / Initial Investment

In this case,

interest rate = 30,000 / 475,000 = 6.32% is the rate at which this would be a fair deal.

jeff jeffy answered 2 years ago
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