Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,200 monthly. The contract currently sells for $109,000.

a.	What is the monthly return on this investment vehicle? (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. monthly return=monthly payment/Current value

=1200/109,000

=1.10%(Approx).

b.APR=(1.10%/month*12 months)

=13.21%(Approx).

c.EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.011)^12]-1

=14.04%(Approx).