Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,400 monthly. The contract currently sells for $73,000.

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

b

What is the APR?

c.	What is the effective annual rate?

Answer 1

Information provided:

Monthly payment= $1,400

Present value= $73,000

a.Present value of the perpetuity payment each month= monthly payment/ discount rate

$73,000= $1,400/ discount rate

discount rate= $1,400/ $73,000

= 0.0192

Monthly return= 0.0192*100

= 1.9178% 1.92%.

b.APR= 1.9178%*12

= 23.0137% 23.01%.

c.Effective is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.2301/12)^12- 1

= 1.2560 - 1

= 0.2560*100

= 25.60%.

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