Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,55

Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,550 monthly. The contract currently sells for $62,000.

(a) What is the monthly return on this investment vehicle?

(c) What is the effective annual rate? (Do not round your intermediate calculations.)

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,550 monthly. The contract currently sells for $62,000.

(a) What is the monthly return on this investment vehicle?

Explanation / Answer

a: PV of perpetuity= Annuity / rate

62000=1550/ r

r= 1550/62000 = 2.5% per month

b: APR= Month rate*12 = 2.5%*12 = 30%

c: EAR = (1+ APR/12)^12 -1

= (1+0.3/12)^12 -1

=34.49%

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