Question

Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. A representative for Curly’s tells you the policy costs $550,000. At what interest rate would this be a fair deal? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Interest rate %

Answer 1

Answer:

r = 5.45%

Explanation:

Given that

30,000 is to be paid per year

550,000 is the policy cost

Therefore

Using present value of perpetuity

PV = D/r

550,000 = 30,000/r

Where

r = interest rate

Dividend = 30,000

PV = 550,000

Thus

r = 30,000 ÷ 550,000

r = 5.45%