Question

Reign Cane Life Insurance is selling a perpetuity contract that pays $1,250 monthly. The contract currently sells for $250,000. What is the monthly return on this investment vehicle? What are the APR and EAR on this investment? Do not use excel or a calculator to solve

Answer 1

Return on Investment (Monthly) = Monthly Payments / Amount of Contract * 100

                                     = 1250 / 250000 * 100

                                                     = 0.50%

APR = Monthly Return * 12 Months = 0.50% * 12 = 6.00%

EAR = (1 + r )^n - = (1 + 0.5%)^12 - 1 = 6.17%