Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $31,000 per year forever. Suppose a sales associate told you the policy costs $476,000. At what interest rate would this be a fair deal?

Answer 1

Answer: 6.51%

Explanation:

To get the interest rate at which the deal will be fair

Annual payment per year/ cost × 100

Perpetuity = D/r

476000 = 31000/r

r = 31000÷ 476000

r = 0.06512

r = 0.06512 × 100

r = 6.512%

Where D is the dividend

r is the rate