An insurance company is offering a new policy to its customers. Typically, the p

Question

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company First birthday: Second birthday Third birthday: Fourth birthday: Fifth birthday: Sixth birthday: S S S S S S 840 840 940 940 1.040 1,040 After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $385,000 If the relevant interest rate is 11 percent for the first six years and 7 percent for all subsequent years, what is the value of the policy at the child's 65th birthday? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Child's 65th birthday $

Explanation / Answer

value at the end of sixth birthday = 840 * 1.11^5 + 840 * 1.11^4 + 940 * 1.11^3 + 940 * 1.11^2 + 1040 * 1.11 + 1040

value at the end of sixth birthday = 7328.7751

value on the 65th birthday = 385,000 - 7328.7751 * 1.07^59 = -11,893.77

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