Question

Your insurance agent is trying to sell you an annuity that costs $45,000 today. By buying this annuity, your agent promises that you will receive payments of $380 per month for 15 years. What is the rate of return expressed as an APR on this investment?

(a) 6.87%

(b) 5.01%

(c) 5.76%

(d) 6.01%

(e) 5.55%

Answer 1

Information provided:

Present value= $45,000

Monthly payment= $380

Time= 15 years*12= 180 months

The rate of return is calculated by computing the yield to maturity.

Enter the below in a financial calculator to compute the yield to maturity:

PV= -45,000

PMT= 380

N= 180

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 0.5009

Therefore, the rate of return expressed as an APR is 0.5009%*12= 6.01%.

Hence, the answer is option d.

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