Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,450 monthly. The contract currently sells for $114,000. a. What is the monthly return on this investment vehicle? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the APR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the effective annual return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

a. 1.27%

b. 15.24%

c. 16.35%

Explanation:

a. What is the monthly return on this investment vehicle?

The formula for the value of a Perpetuity is;

Value = Payment/ rate

Rate = Payment/ Value

Rate = 1,450/114,000

= 0.0127

= 1.27%

b. What is the APR?

APR is the annual rate. The above figure is the monthly rate.

APR = Monthly rate * 12

= 1.27 * 12

= 15.24%

c. What is the effective annual return?

Effective annual return = [1 + (APR/n)]^n – 1

n is the number of compounding periods which is 12 here for monthly compounding.

= [1 + (15.24%/12)]^12– 1

= 16.35%