# Professor's Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of...

## Question:

Professor's Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $70,000 at age 65, the firm will pay the retiring professor $500 a month until death. If the professor's remaining life expectancy is 20 years, what is the (implied) APR on this annuity? What's the implied EAR? Please show work/calculations.

## Annualized Percentage Rate and Effective Annual Rate:

Annualized Percentage Rate(APR) and Effective Annual Rate(EAR) both are stated on yearly basis with the main difference is that the APR is annualized by multiplying the number of periods in a year while EAR takes compounding into consideration and hence EAR is the better estimate of the returns.

## Answer and Explanation: 1

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View this answera. APR on this annuity is 6%

b. The implied EAR is 6.17%

- Present Value,
*PV*= $70,000 - Monthly payment,
*A*= $500 - Number of payments in 20 years,
*n*=...

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Chapter 7 / Lesson 6Know the definition of the effective annual rate (EAR), see the formula for calculating the effective annual rate, and explore some examples on how to calculate the effective annual rate.

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