Question

Chapman Life Insurance Company is selling a perpetual annuity contract that pays $1000 monthly. The contract currently sells for 25,000. What is the monthly return on this investment miracle (Hint: what is the periodic interest rate)? What is the APR?

Answer 1

PV of Perpetuity = 25,000

C = 1,000

PV = C/ r

25,000 = 1,000/ r

r = 0.04

r is periodic rate.

Periodic Rate = APR/ (number of compounding periods per year)

0.04 = APR/ (12)

APR = 0.48