Question

A life insurance co. is trying to sell you an investment policy that will pay you and your heirs $15367 per year forever. If the policy costs $546357 today, at what interest rate (in percent) is it properly priced? Answer to two decimals.

Answer 1

An investment that pays forever by investing a lump sum today is called a perpetuity

Value of a perpetuity

= Annual payments / Interest rate

Where,

Value of perpetuity = $546,357

Annual payments = $15,367

So, putting these values in above equation we get,

$546,357 = $15,367 / Interest rate

So, Interest rate = $15,367 / $546,357

= 0.0281 or 2.81%