Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,050 monthly. The contract currently sells for $70,000. a. What is the monthly return on this investment vehicle

Answer 1

a. 1.5% monthly

b. 18% per annum

c. 19.56%

Step-by-step explanation:

Below are the missing sub-questions

"b. What is the Annual Percentage Rate?

c. What is the effective annual return?"

Solution

a. Monthly return = 1,050 / 70,000

Monthly return = 0.015

Monthly return = 1.5% monthly

b. APR = 12 month * 0.015

APR = 0.18

APR = 18% per annum

c. EAR = (1+0.015)^12 -1

EAR = 1.015^12 - 1

EAR = 1.195618 - 1

EAR = 0.195618

EAR = 19.56%