A.) The Perpetual Life Insurance Co. is trying to sell you an investment policy

Question

A.) The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $11,000 per year forever.

If the required return on this investment is 4.4 percent, how much will you pay for the policy?

Suppose the Perpetual Life Insurance Co. told you the policy costs $240,000.

At what interest rate would this be a fair deal?

B.) A prestigious investment bank designed a new security that pays a quarterly dividend of $4.10 in perpetuity. The first dividend occurs one quarter from today.

What is the price of the security if the APR is 4.9 percent, compounded quarterly?

Explanation / Answer

I am solving the first problem as per Chegg guidelines, since A and B are two different questions, post multiple questoin to get the remaining answers

A)

Using the perpetuity equation we can write

PV = C/r

240,000= 11,000/r

r =11,000/240,000 = 4.583%

Hence the deal will be fair deal if the rate of interest is equal to 4.583%

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