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4 August, 12:53

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,400 monthly. The contract currently sells for $113,000.

What is the monthly return on this investment vehicle? (Round your answer to 2 decimal places. (e. g., 32.16))

Monthly return % per month

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  1. 4 August, 12:58
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    Monthly return % per month = 1,24%

    Explanation:

    The formula to determined the value of the perpetuity cash flow is:

    PV of perpetuity = Periodic cash inflow / Interest rate

    Perpetuity is characterized by being a kind of annuity where cash continues forever.

    PV of the perpetuity = Periodic cash inflow / Interest rate

    $113,000 = $1,400 / Interest Rate

    Interest rate = 1,400 / 113,000 = 1,24%

    Interest rate = 1.24% per month
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