Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays $2
ID: 2791000 • Letter: M
Question
Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays $2,500 monthly. The contract currently sells for $331,000.
What is the monthly return on this investment vehicle? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Monthly return %
What is the APR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Annual percentage rate %
What is the effective annual return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Effective annual return %
Explanation / Answer
Current Contract Value, CV =$331,000
Per month annuity amount, MA =$2500
a.) Monthly Return = MA/CV = 2500/331000 = 0.00755 or 0.755%
b.) Annual Percentage Return = 0.755 x 12 = 0.0906 = 9.06%
c.) Effective Annual Return = (1+ APR/12)12 = (1 + 0.09063/12)12 -1 = 1.09449 -1 = 0.09449 or 9.449%