Question

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?

Answer 1

Level payments? Why is that hard? You should know this. They only get harder.

i = Expected Rate of Return
v = 1/(1+i)

\($109,296 = $12,000\cdot\dfrac{1 - v^{15}}{i}\)

What's your plan for solving that fir 'i'?

Answer 2

I came up with 9%, sorry, I didn't get all of my question entered. Is 9% correct?

Answer 3

How did you get 9%?

Answer 4

divided both sides by 12,000

Answer 5

And then...

Answer 6

divided both sides by i, then divided both sides by 1

Answer 7

Very bad. Let's follow the rules of algebra.

1) I hope you MULTIPLIED by 'i'.
2) There is no "divide both sides by 1". Why would that help, anyway?

if 5x = 4, dividing both sides by 1 produces 5x = 4. Well, THAT didn't do anything!

Answer 8

Sorry, I meant multiplied. I haven'e done this for 20 years and am trying to do work on another problem while we are working on this one. so now I have 9.108 (i) = 1/1+i correct

Answer 9

9.108i

Answer 10

No. I'm still wondering how you are getting anywhere near 9%, since the correct value is 7%.

I probably should let you off the hook. This equation CANNOT be solved explicitly for 'i'. It is an interative process. Have you EVER done that? Maybe you have a calculator that will do it for you?

Answer 11

This is for a corporate finance class and interative process is not in any of the readings or examples. Thank you for your help, but I think I may have to ask the teacher for help which is also difficult because this is an online class.