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26 February, 18:24

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $31,000 per year forever. Suppose a sales associate told you the policy costs $476,000. At what interest rate would this be a fair deal?

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  1. 26 February, 18:50
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    Answer: 6.51%

    Explanation:

    To get the interest rate at which the deal will be fair

    Annual payment per year / cost * 100

    Perpetuity = D/r

    476000 = 31000/r

    r = 31000: 476000

    r = 0.06512

    r = 0.06512 * 100

    r = 6.512%

    Where D is the dividend

    r is the rate
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