Your Insurance Agent Is Trying to Sell You an Annuity

question 98

Multiple Choice

Your insurance agent is trying to sell you an annuity that costs $230,000 today.By buying this annuity,your agent promises that you will receive payments of $1,225 a month for the next 30 years.What is the rate of return on this investment?

• A)3.75 percent
• B)4.47 percent
• C)4.93 percent
• D)5.45 percent
• E)5.67 percent

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Definitions:

Straight-Line Depreciation

A procedure for apportioning the cost of a tangible good over its operational lifespan in uniform annual amounts.

Initial Investments

The initial capital outlay required to start a project, purchase assets, or acquire a company, reflecting the upfront costs to begin operations.

After-Tax Discount Rate

The discount rate adjusted for the effects of taxes, used in net present value (NPV) calculations to determine the value of future cash flows after tax.

Income Tax Rate

The percentage at which an individual or corporation is taxed on its income, with the rate often varying based on the level of income.