Fidelity Mutual (an insurance company) has offered you a single premium annuity that will pay you $12,000 at the end of each year for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return?

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Arianna

10 June, 11:37

Fidelity Mutual (an insurance company) has offered you a single premium annuity that will pay you $12,000 at the end of each year for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return?

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Luciana Lam · Answer 1

Given:

Initial Investment = 109,296

annual return = 12,000 for 15 years.

Usually the expected rate of return uses rates in percentage form. ERR is calculated by taking the average of the probability distribution of all possible returns.

However, based on the given figures, I think the best formula for this would be the accounting rate of return.

ARR = Average Accounting Profit / Average Investment

ARR = 12,000 / 109,296

ARR = 0.10979

ARR = 0.10979 100% = 10.979 or 10.98%

The expected rate of return is 10.98%