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2 April, 20:37

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $26,000 per year forever. Suppose a sales associate told you the policy costs $471,000. At what interest rate would this be a fair deal?

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  1. 3 April, 00:02
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    Answer: 5.52%

    Explanation:

    Perpetuity value (V) = $471, 000

    Perpetuity cashflow (C) = $26,000

    Interest rate (r) = ?

    Perpetuity value (PV) is related to perpetuity cashflow (C) and interest rate (r) by the equation:

    PV = C : r

    Therefore,

    Interest rate = perpetuity cashflow : perpetuity value

    Interest rate = $26,000 : $471,000 = 0.0552

    Interest rate = 0.0552 or 5.52%
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Home » Business » The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $26,000 per year forever. Suppose a sales associate told you the policy costs $471,000. At what interest rate would this be a fair deal?
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