Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $27,000 per year forever. Suppose a sales associate told you the policy costs $472,000. At what interest rate would this be a fair deal

Answer 1

Answer:

5.72%

Explanation:

This involves perpetual annuity, where there are equal cash flows for infinity paid in specific durations

To find the interest rate we use the perpetuity cash flows equation.

Present value(P)= Yearly payments(Y)/Interest rate(I)

P= $472,000

Y= $27,000

I= ?

So 472,000= 27,000/I

Cross-multiply

472,000*I= 27,000

I= 27,000/472,000

I= 0.0572

Remember to express interest as percentage

I= 0.0572* 100= 5.72%