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28 December, 12:33

New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return?

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  1. 28 December, 12:54
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    7%

    Explanation:

    The Present value of this single annuity = $109295.

    $amount of each annuity = 12000.

    By estimation, if we take interest rate (r) = 0.07 or 7% in annuity factor formula it will be ((1 - (1 / (1+0.07) ^15)) / 0.07) = 9.1079.

    Now, 109295/12000 = 9.1079. So, here answer will be 7%
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