Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,350 monthly. The contract currently sells for $71,000.

Required:

(a) What is the monthly effective return on this investment vehicle?

(b) What is the APR? (Do not round your intermediate calculations.)

  

(c) What is the effective annual rate (EAR)? (Do not round your intermediate calculations.)

  

Answer 1

Answer to Part a.

Monthly Return = Monthly Payment / Contract Price
Monthly Return = $1,350 / $71,000
Monthly Return = 1.90%

Answer to Part b.

Annual Return (APR) = Monthly Return * 12
Annual Return (APR) = 1.90% * 12
Annual Return (APR) = 22.80%

Answer to Part c.

Effective Annual Rate = (1+ Monthly Return)^ 12 – 1
Effective Annual Rate = (1 + 0.0190)^12 – 1
Effective Annual Rate = 1.0190^12 – 1
Effective Annual Rate = 1.2534 – 1
Effective Annual Rate = 0.2534 or 25.34%