You have just purchased a life insurance policy that requires you to make 40 sem

Question

You have just purchased a life insurance policy that requires you to make 40 semiannual payments of $350 each, where the first payment is due in 6 months. The insurance company has guaranteed that these payments will be invested to earn you an effectiv e annual rate of 8.16 percent, although interest is to be compounded semiannually. At the end of 20 years (40 payments), the policy will mature. The insurance company will pay out the proceeds of this policy to you in 10 equal payments, where the first pay ment to be made one year after the policy matures. If the effective interest rate remains at 8.16 percent, how much will you receive during each of the 10 years?

(Hint: (a) compute future value of your 40 payments, (b) Compute the amount of 10 annuity pa yments whose present value is the FV you found in (a). Since the effective interest rates is fractional, use equation of Table A-2 to get the interest factors)

Explanation / Answer

(a)

Future value = $33,258.93

The effective annual rate is mentioned, so first compute the periodic rate, so the periodic rate is 4%

PMT = -350, PV = 0, I/Y = 4, N = 40

Using excel FV = $33,258.93

Formula Being ( =FV(0.04,40,-350,-0,0) )

(b)

Annuity Amount = $4,992.39

Using PMT function ( =PMT(8.16%,10,-33258.93,0,0) )

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