Question

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%

Answer 1

(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