Question

1. The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. Suppose a sales associate told you the policy costs $800,000. At what interest rate would this be a fair deal? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

2. Your credit card company charges you 1.41 percent per month. What is the EAR on your credit card?

Answer 1

1.Interest rate=Annual cash flows/Current value
=(35,000/800,000)

which is equal to

=4.38%(Approx).

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

=[(1+0.0141)^12]-1

=18.30%(Approx).