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

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 $ 770 $ 770 $ 870 $ 850 $ 970 $ 950 y, no more payments are made. When the child reaches age 65, he or she receives $270,000. If the relevant interest rate is 10 percent for the frst sik years and 7 percent for all subsequent years, what would the value of the deposits be when the policy matures? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16) Future value

Explanation / Answer

We will calculate the future value of each payment based on the interest rate of 10% for first six years and 7% for all subsequent years FV1 (770)*(1.10^6) 1364.102 FV2 (770)*(1.10^5) 1240.093 FV3 (870)*(1.10^4) 1273.767 FV4 (850)*(1.10^3) 1131.35 FV5 (970)*(1.10^2) 1173.7 FV6 (950)*(1.10^1) 1045 FV for six years 7228.012 No of yrs left for 65 yrs - 65-6 59 Interest rate after first six years is 7% FV = (7228.012)*(1.07^59) 7228.012*54.15554 391436.89 Future Value                              $ 391436.89 The Value of the deposits would be $ 391436.89 when the policy matures

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