New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return?
A) 8%
B) 9%
C) 7%
D) 10%

Question

Quizplus · Accepted Answer

The expected rate of return for an annuity can be calculated using the present value formula for annuities. In this case, the present value ($109,296) equals the annual payment ($12,000) divided by the rate of return. Using a financial calculator or an annuity present value formula, you can solve for the rate of return that makes the present value of the annuity payments equal to the cost of the annuity ($109,296). The correct rate of return that matches this scenario is approximately 7%.

New Jersey Mutual Has Offered You a Single Premium Annuity