An insurance company is offering a new policy to its customers. Typically, the policy is bought...


First birthday:	$	880
Second birthday:	$	880
Third birthday:	$	980
Fourth birthday:	$	980
Fifth birthday:	$	1,080
Sixth birthday:	$	1,080

After the child’s sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $420,000.

If the relevant interest rate is 12 percent for the first six years and 7 percent for all subsequent years, what is the value of the policy at the child's 65th birthday?

Solutions

Expert Solution

Let's calculate the value of the payment after 6 years using following formula.

FV = 880 x (1 + 12%)^5 + 880 x (1 + 12%)^4 + 980 x (1 + 12%)^3 + 980 x (1 + 12%)^2 + 1,080 x (1 + 12%) + 1,080

= $7,831.30

It's value 59 years later at age 65,

FV = PV x (1 + r)^n = 7,831.30 x (1 + 7%)^59 = $424,108.20 would be the value of policy at 65th birthday.

jeff jeffy answered 2 years ago

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