Question

1.

Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays $2,750 monthly. The contract currently sells for $400,000. a. What is the monthly return on this investment vehicle? (Do not round Intermediate calculations and 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.) a. Monthly return b. Annual percentage rate c. Effective annual return

2.

Answer 1

1.

a.

The formula for perpetuity present value can be used to calculate monthly interest rate.

Present value = Cash flow Interest rate

400,000 = 2.750 Interest rate

2.750 Interest rate = - 400.000

Interest rate = 0,006875

Interest per month is 0.69%.

b.

Annualized percentage rate would be 0.006875*12 = 0.0825.

This means 8.25% APR.

c.

The below expression can be used to calculate EAR:

BAR = (1+ APR)-1

EAR = (1 +0.0825) + 12 ) -1

EAR = (1.006875)2 - 1

EAR = 1.0857 – 1

EAR = 0,0857

EAR is 8.57%.

2.

Rate of return on investment G is:

30,000 X (1+i) = 65,000

(1 + ) = 2.16667

(14)= 2.16667

(1+i) = 1.1375

i = 0.1375

Rate of return is 13.75%.

Rate of return on investment H is:

30,000 X (1+i)= 98,000

(1 + i)' = 3.26667

(1+1)=3.266675

(1+i) = 1.1406

i = 0.1406

Rate of return is 14.06%.