At retirement in December, you buy a special type of insurance policy called an immediate term...

At retirement in December, you buy a special type of insurance policy called an immediate term annuity. This policy promises to pay the holder (or the holder’s heirs) $25,000 per year for the next 11 years. Each payment is at the start of the year. (Hence, the first payment will be very shortly after purchase of the policy.) The appropriate discount rate is 2.56% per year, compounded annually. What is the value of this policy to the policy holder?

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Expert Solution

Present value of annuity due=(1+rate)*Annuity[1-(1+interest rate)^-time period]/rate

=1.0256*25000[1-(1.0256)^-11]/0.0256

=25000*9.72499136

=$243124.78(Approx).

jeff jeffy answered 1 year ago

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