Question

In: Finance

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,450 monthly. The contract...

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,450 monthly. The contract currently sells for $67,000.

Required:
(a) What is the monthly return on this investment vehicle?
(Click to select)46.21%2.16%2.60%1.84%2.49%
(b) What is the APR? (Do not round your intermediate calculations.)
(Click to select)23.31%23.37%28.57%25.97%27.27%
(c) What is the effective annual rate? (Do not round your intermediate calculations.)
(Click to select)30.76%29.30%26.37%32.23%27.83%


Solutions

Expert Solution

(a) Monthly return 2.16%
Working:
Monthly return = Monthly dollar return/Investment
= $       1,450 / $       67,000
= 2.16%
(b) APR 25.97%
Working:
APR = Monthly return*number of months in a year
= 2.16% * 12
= 25.97%
(c) Effective annual rate 29.30%
Working:
Effective annual rate = ((1+i)^n)-1 where,
= ((1+0.0216)^12)-1 i 2.16%
= 29.30% n 12

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