Question

assume that you have just come to a settlement agreement with your insurance company. They have agreed to a structured settlement where they will make a total of 37 payments of $1450 each over the next 15 years, where the first payment will be made today and all other payments will be paid every 5 month thereafter. You have determined that the present value of this structured settlement is $38,320.94 today. given this information, determine your nominal annual required rate of return, with monthly compounding.

Answer 1

Question ask to calculate the Nominal rate having monthly compounding.

Given Present value = 38320.94, 37 payments of 1450 each

This can be solved by Trial and error method and then Interpolation:

Calculate pv @ 2%

= 1450 + 1450 x Cumulative discounting factor @ 2% for 36 years

= 1450 + 1450 x 25.4888

= 38408.82

Calculate Pv @3%

= 1450 + 1450 x 21.8322

= 33106.76

Do interpolation

= 2.0166%

This rate is 5 monthly rate and question ask for monthly compunding nominal rate. So adjust rate accordingly as 2.0166

=

= 0.400105 % per month basis

So 0.400105 x 12= 4.80% Approx

4.80% Approx nominal rate monthly compunding