Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,250 monthly. The contract currently sells for $245,000. a. What is the monthly return on this investment vehicle? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the APR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the effective annual return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

A:

Present value of perpetuity = Cash flow per period/ Rate per period

245000 = 1250/R

R = 0.005102

Hence Monthly rate = 0.51%

B: APR = Monthly rate * 12 =

= 0.005102*12

= 0.061224

APR = 6.12%

C: Effective rate = EAR= (1+APR/m)^m-1

= (1+ 0.061224/12)^12 -1

=6.3%