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?

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%

= 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