Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays $2,400 monthly. The contract currently sells for $332,000.
What is the monthly return on this investment vehicle?
What is the APR?
What is the effective annual return?
Solution:
PV = C/r
PV = $332,000 ; C = $2,400
$332,000 = $2,400 / r
.r = $2,400 / $332,000
.r = 0.0072289 or 0.72%
2. Calculating APR
To calculate APR we multiply the interest rate by number of months in a year.
APR = 12 x 0.72%
= 8.64%
3. EAR = [1 + (APR/m)]m - 1
= [1 + ( 0.0864 / 12 )12 – 1
= [1 + (0.0072) 12 – 1
= 1.0899 – 1
= 0.0899 or 8.99%
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