Consider an insurance policy that promises to pay the holder $788 per month for the next...

Consider an insurance policy that promises to pay the holder $788 per month for the next 20 years. The first payment will be one month after the purchase of the policy. (This type of policy is called a term annuity.) The appropriate discount rate is an APR of 8.98%, compounded monthly.

What is the value of this policy?

Round your answer to the nearest dollar.

Expert Solution

Step 1: calcualate the Cumulative value PV for 239 Months @ 0.0074833 (Per month rate i.e. 0.0898/12) as the payment will be made after 1 month so remaining period of cash inflow would be for 239 months.

Cumulative Discount Factor formula used is (1 - (1 + r) ^-t ) / r where r is the period interest rate (0.0074833) expressed as a decimal and t is the period (239 moths)

Formula of Cumulative value of PV = (1-(+0.0074833)^-239/0.0074833) = 111.1370

In order to find the value of insurace policy, multiply the Cash inflow with Cumulative value of PV

Insurance value = 111.1370*788 = $87576

jeff jeffy answered 2 years ago

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