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21 December, 18:17

Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $43,000 per year forever. A representative for Curly's tells you the policy costs $680,000. At what interest rate would this be a fair deal?

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  1. 21 December, 18:40
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    rate = 6.3235%

    At a market rate of 6.3235% this will be a fair deal

    Explanation:

    under perpetuities the principal is never redeem. the investor receive cash payment for an indefinite period of time

    This means:

    perpetuities present value = C/r

    where:

    C = annual payment

    r = rate

    680,000 = 43,000/rate

    43,000/680,000 = rate

    0.06323529 = rate

    rate = 6.3235%
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