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9 March, 10:00

You just paid $360,000 for a policy that will pay you and your heirs $13,200 a year forever. What rate of return are you earning on this policy?

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Answers (2)
  1. 9 March, 10:55
    0
    Rate of return = 3.667%

    Explanation:

    This is a for of annuity known as perpetuity. Am annuity is an investment that gives yearly returns on the capital

    To get the rate of return we use the following formula

    Present value = Yearly payments/Rate of return

    360,000 = 13,200/rate of return

    Cross-multiply

    Rate of return (360,000) = 13,200

    Rate of return = 13,200/360,000

    Rate of return = 0.03666666 = 3.667%
  2. 9 March, 13:59
    0
    = 3.67%. This means you are to earn at 3.67% on the policy taken

    Explanation:

    The question is to determine the rate of return of earnings based on the detailed policy.

    Rate of Return

    This represents a percentage of any investment that can either be a gain or a loss as calculated based on a particular time period. The Rate of Return can simply be called the RoR.

    The Rate of Return in the question is calculated as follows:

    First, what is the payment for the policy = $360,000

    What is the annuity to be paid a year forever = $13,200

    Therefore rate of return is simply

    = Annuity / Initial Policy Payment

    = $13,200 / $360,000 x 100

    = 3.67%. This means you are to earn at 3.67% on the policy taken
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