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Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,250 monthly. The contract...

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,250 monthly. The contract currently sells for $75,000.

a. What is the monthly return on this investment vehicle?

b. What is the APR?

c. What is the effective annual rate?

Solutions

Expert Solution

a. Monthly Rate =Monthly Payment/Current Price =1250/75000 =1.6667% or 1.67%

b. APR =12*Monthly Rate =12*1250/75000 =20.00%

c. EAR=(1+Monthly Rate)^n-1 =(1+1250/75000)^12-1 =21.94%

jeff jeffy answered 2 years ago
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