A life insurance company advertises that $50,000 will purchase a 20-year annuity paying $402.80 at the end of each month. What effective rate of return does the annuity investment earn?

Question

Quizplus · Accepted Answer

The effective rate of return can be calculated using the formula for the future value of an annuity and solving for the interest rate. The given annuity pays $402.80 monthly for 20 years, which is 240 payments. Using financial formulas or a financial calculator, the effective annual rate that equates the present value of these payments to $50,000 is approximately 7.76%.

A Life Insurance Company Advertises That $50,000 Will Purchase a 20-Year