Question

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,400 monthly. The contract currently sells for $113,000.

What is the monthly return on this investment vehicle? (Round your answer to 2 decimal places. (e.g., 32.16))



Monthly return % per month

Answer 1

Answer:

Monthly return % per month = 1,24%

Explanation:

The formula to determined the value of the perpetuity cash flow is :

PV of perpetuity = Periodic cash inflow/ Interest rate

Perpetuity is characterized by being a kind of annuity where cash continues forever.

PV of the perpetuity = Periodic cash inflow/ Interest rate    

$113,000 = $1,400 / Interest Rate    

Interest rate = 1,400/ 113,000 = 1,24%

Interest rate = 1.24% per month