Your bank is selling an investment policy that will pay you $23,000 per year for

Question

Your bank is selling an investment policy that will pay you $23,000 per year forever. You require a return of 7 percent (compounded monthly) on this kind of investment and this policy is being sold for $240,000.00. (a) Is this a good investment for you? (b) At what rate would this be a fair investment? (c) Now suppose the investment policy specifies that you will receive $23,000 per year forever starting 10 years from now (i.e., if you buy the policy today, you will receive the first payment exactly 10 from now.) How much would you be willing to pay today for this policy?

Explanation / Answer

a> Particular Year Amount Perpetuity value of 23000@7% =A/I , A=Annitu and I=Interest A=23000,i=7% 328571.4 Yes, at 2,40,000 it is a good investment c> If amount received after 10years Perpetuity - Compound value for 10 years A/i-A(1+i)^n 283326.9

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