What is the answer for 3. The Maybe Pay Life Insurance Co. is trying to sell you
ID: 2649497 • Letter: W
Question
What is the answer for
3.
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $26,000 per year forever. If the required return on this investment is 5.3 percent, how much will you pay for the policy? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
$
4.
Find the EAR in each of the following cases (Use 365 days a year. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.):
5.
Find the APR, or stated rate, in each of the following cases (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.):
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $26,000 per year forever. If the required return on this investment is 5.3 percent, how much will you pay for the policy? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
3)Amount to pay for policy = Amount paid per annum / return
= 26000 /.053
= $ 490,566.04
4) EAR = [1+(Rate/Number of times it is componded)]^Number of compounding period -1
If componded quarterly = Number of compounding period in a year = 4
= [1+(.08/4)]^4]-1
= [1+.02]^4-1
=[1.02]^4 -1
= 1.0824-1
EAR =.0824 or 8.24 %
If compounded monthly , compounding period = 12
[ 1 +(.17/12)]^12 -1
[ 1+.01417]^12-1
[ 1.01417]^12-1
1.18394-1
EAR = .18394 or 18.39 %
If compounded Daily , compounding period = 365
[ 1+(.13 /365)]^365-1
[ 1+.00036]^365-1
[1.00036]^365-1
1.1387 -1 [using log table]
EAR = 13.87%
If compounded infinetly = EAR = e^Rate -1
where value of e= 2.718
EAR =[ (2.718)^.10] -1
1.1051 -1
EAR = .1051 OR 10.51 %
5) APR = Number of compounding per period* [(EAR+1)^(1/Number of compouning) -1 ]
If compounded semiannually =Compounding per year =2
2 *[(.113 +1)^(1/2) -1]
2 * [(1.113)^.5 -1]
2* [ 1.05499-1]
2* .05499
APR =.10998 or 11%
If compounded monthly = Number of periods = 12
APR = 12 * [(.122 +1)^(1/12) -1]
= 12*[ (1.122)^.0833-1 ]
= 12 *[ 1.00964-1]
= 12* .00964
APR =.11568 or 11.57 %
If compounded weekly = number of periods =52 weeks
= 52 *[(.099+1)^(1/52)-1]
=52 * [(1.099)^.01923-1]
= 52 *[1.001817-1]
= 52* .001817
APR =.0945 or 9.45 %
If compounded infinetly =
EAR =(e^r)-1
where value of e is the constant used to calculate continuous compounding usually equals to =2.718
(e^.r) -1 =.1360
(e^r) =1.1360
IN(1.1360) = .1275 [ IN is the naturl log so the value of IN(1.1360 )can be find
APR =12.75 % from log table]
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