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7 October, 19:51

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 %

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  1. 7 October, 20:08
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    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%
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