Question

Q13 hw 2

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,150 monthly. The contract currently sells for $71,000.

Required:
(a)	What is the monthly return on this investment vehicle?
	(Click to select)  1.94%  1.62%  61.74%  1.86%  1.38%

(b)	What is the APR? (Do not round your intermediate calculations.)
	(Click to select)  21.38%  20.41%  17.49%  19.44%  17.89%

(c)	What is the effective annual rate? (Do not round your intermediate calculations.)
	(Click to select)  22.33%  19.14%  23.39%  21.27%  20.20%

rev: 09_17_2012

Answer 1

a). Current Price of Pepetual contract = $71,000

Monthly payment = $1150

Calculating Monthly return on Perpetual contract Investment = Monthly payment/Current Price of Pepetual contract

= $1150/$71,000

= 1.62%

Option 2

b). Annual Percentage rate(APR) = Monthly return*12

= 1.62%*12

= 19.44%

Option 4

c). Calculating Effective Annual Rate(EAR):-

where,

r = Interest rate =19.44%

m = no of times compounding in a year = 12

EAR = 1.21269 - 1

EAR = 21.27%

Option 4

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