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20 June, 05:22

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,600 monthly. The contract currently sells for $117,000. a. What is the monthly return on this investment vehicle?

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  1. 20 June, 08:04
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    The monthly return on this investment vehicle is 1.37%

    Explanation:

    A perpetuity contract is one which lasts forever, It does not any time limit. Live Forever Life Insurance Co will pay $1,600 for indefinite time on today's investment of #117,000.

    Monthly return will be calculated using following formula:

    Present value of Perpetuity = Perpetuity Received / Interest rate

    $117,000 = $1,600 / r

    r = $1,600 / $117,000

    r = 1.37%

    Monthly return on the perpetuity is 1.37% for this perpetuity.
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