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23. Annuities and Interest Rates. Professor's Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $80,000 at age 65, the firm will pay the retiring professor $600 a month until death.

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23. Annuities and Interest Rates. Professor's Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $80,000 at age 65, the firm will pay the retiring professor $600 a month until death.

a. If the professor's remaining life expectancy is 20 years, what is the monthly rate on this annuity?

What is the effective annual rate?

b. If the monthly interest rate is .5 percent, what monthly annuity payment can the firm offer to the retiring professor?

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Solution Summary

Short discussion on payout annuities and then the computation done by hand.

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PAYOUT ANNUITIES

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The following information is really helpful. It comes from http://www.math.hawaii.edu/~hile/math100/consg.htm.

"A payout annuity works like a home mortgage, except that you turn the tables on the bank - you become the lender and the bank is the borrower. You give the bank a sum of money, and the bank pays you back with regular and equal payments over a specified time period. The bank pays simple interest on the outstanding ...

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