Question

Live Forever Life Insurance is selling a perpetuity contract that pays $1500 a month. The contract sells for $115,000. a) What’s the monthly return of this contract? b) What’s the APR? c) What’s the Effective Annual Return (EAR)?

Answer 1

a.monthly return = $1500 a month / 115,000 invested

=>1500/115000

=>1.30%.

b.APR =1.30%*12

=>15.6%.

c.Effective annual return

=> ( 1+ APR / 12months)^12 - 1

=>(1.0130)^12-1

=>0.1677

=>16.77%.