Question

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 Annual percentage rate C. Effective annual return

Answer 1

Monthly return=Monthly payment/Current value

=(2750/400,000)

=0.69%(Approx).

APR=0.69%/month*12 months

=8.25%

EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.0069)^12]-1

=8.57%(Approx).