Question

Eternity Insurance is selling a perpetuity contract that pays $1,050 monthly. The contract currently sells for $61,000.

a.	Calculate the monthly rate of return on this investment.

b.	Calculate the APR.

c.	Calculate the effective annual rate.

Answer 1

a.monthly rate of return=Monthly payment/Current value

=1050/61,000

=1.72%(Approx).

b.APR=1.72%*12 months

=20.66%(Approx).

c.EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.0172)^12]-1

=22.73%(Approx).