An insurance company is offering monthly payments of $250 for the next twenty years in exchange for a one-time payment of $40,000 today. What is the rate of return on this offer?

Question

Quizplus · Accepted Answer

The rate of return for this offer can be calculated using the formula for the present value of an annuity. The monthly payments of $250 over 20 years (240 months) are compared to the one-time payment of $40,000 today to find the interest rate that equates the present value of the annuity payments to the $40,000. Using financial calculators or software that can solve for the interest rate given these parameters will yield a rate of approximately 4.36%.

An Insurance Company Is Offering Monthly Payments of $250 for the Next