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

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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Answer:

Year Payment FVF FVA
1 880 1.762341683 1550.860681
2 880 1.57351936 1384.697037
3 980 1.404928 1376.82944
4 980 1.2544 1229.312
5 1080 1.12 1209.6
6 1080 1 1080
Value of deposits when policy matures PV×(1+r)^n
Here,
1 Interest rate per annum 7.00%
2 Number of years                                   59
3 Number of compoundings per per annum                                     1
1÷3 Interest rate per period ( r) 7.00%
2×3 Number of periods (n)                                   59
Present value (PV) $              
7831.299158
Value of deposits when policy matures $ 424108.23
7831.299158*(1+7%)^59

jeff jeffy answered 1 year ago
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