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?

Question

Quizplus · Accepted Answer

To calculate the expected rate of return, we can use the present value of the annuity formula: PV = Payment x (1-(1+r)^-n)/r, where PV is the present value of the annuity, payment is the payment amount per period, r is the expected rate of return, and n is the number of periods. Plugging in the given values, we get:
$109,296 = $12,000 x (1-(1+r)^-15)/r
Solving for r using a financial calculator or spreadsheet, we get an expected rate of return of approximately 7%. Therefore, the best choice is C.

Fidelity Mutual (An Insurance Company)has Offered You a Single Premium